Red or dead
The first time the football club now known as Manchester United floundered in a swamp of debt it was 1902, and times were not as innocent as they may superficially seem. Newton Heath, originally formed by workers on the Lancashire & Yorkshire Railway in 1878, was bought and set on its financial feet not by the collective efforts of the club's supporters, but by a brewer, John Henry Davies, who paid off the club's debts, renamed it Manchester United -
a visionary stroke of branding - and began to sell his beer to the club's captive fans. Eight years later, Davies made a serious investment: £360,000 to create for United a purpose-built stadium at Old Trafford.
From 1907 United was no longer a members' club, but a limited company, to be traded between businessmen, although subject to the rules of the Football Association (FA), the sport's governing body, restricting shareholders' and directors' ability to make money from the new club companies.
Manchester clothing manufacturer James Gibson rescued United again in the 1930s. He ruled in the paternalistic tradition, supported the club with his own money and in 1945 appointed novice young manager Matt Busby, whose 24 years, battered by the 1958 Munich air crash, furnished United with glory. Busby's chairman after Munich was Louis Edwards, "Champagne Louis", the butcher from Salford, who made the journey from hanger-on-fan to major shareholder by buying chunks of shares between 1962
and September 1963, when Alan Gibson, James' son, sold out.
Edwards ran United like a careful,
fabulous hobby, in an unpaid chairmanship much as the FA had intended it. Then in 1978, with their meat business in trouble, the Edwards family pushed through a famous 1:208 rights issue, which enabled them to make significant money in dividends. In 1989 Martin agreed to sell out for £310m, in the ultimately aborted takeover by Michael Knighton, before,
two years later, he finally cashed in on his shares by floating United on the stock market.
When commentators or football supporters ask, following Malcolm Glazer's £3921m takeover of United, how it came to be that one of our great sporting institutions could simply be bought - unlike the franchises of the American National Football League (NFL), a highly regulated competition, or Spanish football giants Real Madrid and Barcelona, which are still democratic membership clubs - the answer lies in the flotation, and the FA's failure to fashion a different direction for its clubs in the era of satellite TV billions.
United, with Edwards as chief executive, and Alex Ferguson as the rabid success-chaser in the dressing room, backed its playing triumphs in the 1990s with a new commercial thrust: superstores, megastores, an ever-expanding Old Trafford with copious corporate entertainment, blue-chip sponsorships to make rivals weep. The fans protested early on at ticket price rises and what they saw as the commercial sanitising of Old Trafford, but the cash rolled in,
the share price rose, and Martin Edwards sold slices of shares. He made £333m before, in 1998, agreeing to sell United to Rupert Murdoch's BSkyB for £3623m, a deal eventually blocked by the Monopolies and Mergers Commission.
In October 1999 Edwards sold half his remaining shares, making another £340m. Then in May 2002 he sold the bulk of the rest to Harry Dobson, the Scottish mining magnate, ringing in another £320m. His total, for the shares garnered by Louis in the 1960s, then those Martin bought for £3600,000 in 1978: £393m. He was almost all sold out.
Coming up on the inside as the fancied next majority owners of United were the Irish horse racing moguls, John Magnier and JP McManus, first supporting Ferguson, then ramping up their stake to fight him, in a bloody battle over the stud rights to their stallion, Rock of Gibraltar. United supporters almost missed the puzzling accumulation of shares by the obscure American, Malcolm Glazer, who, for reasons undeclared, kept upping his stake until in October 2004 he suddenly lined up alongside Magnier and McManus at just under a bid-triggering 30 per cent.
The media and supporters went on a crash course about Glazer, finding a relentless, ruthless business career, which included a bitter lawsuit brought by tenants of his trailer parks complaining about overcharging, as well as long-running litigation with his own family over the contents of his mother's will. Profiles relate that, driven by the death of his watch-repairing father, Abraham, Glazer made his fortune in trailer parks and property. In 1995 he bought one of the NFL's less-fancied franchises, the Tampa Bay Buccaneers, which he took to a first Super Bowl victory in 2003. Glazer, whose sons, Joel and Avram, work with him, appears to hold much of his wealth now in shares in the Zapata Corporation, which holds stakes in companies making fish oil and safety airbags.
Late last year Glazer moved. On October 4 2004 the board of Manchester United was still confident enough to be quite dismissive about "a preliminary approach" for the club, on which they were seeking clarification. A week later the board named the Glazer family, but stressed that no "definitive proposal"
had been received. Four months later, on 11 February 2005, the United directors made the fuller announcement they seem to have dreaded. The Glazers, who now owned 28.8 per cent of United, had presented a firmer, revised proposal to take over United at £33 a share, significantly higher than the then London Stock Exchange price.
The directors found an unusually contorted way to say they were against it. The price, they conceded, was "fair", but they drew attention to the debts Glazer was taking on, a large chunk to be provided by "preferred securities":
"The board believes that the nature and return requirements of this capital structure will put pressure on the business of Manchester United," they said. "Glazer's business plan assumptions are aggressive and the direct and indirect financial strain on the business could be damaging."
On 28 April the board received another proposal, which it said still contained: "more leverage than the board would consider prudent", and it asked the Stock Exchange to issue a "Put up or Shut up" notice, challenging Glazer to make a bid by 17 May, or go away for six months. Two weeks later Glazer's merchant bankers, NM Rothschild, announced the family had bought Magnier and McManus' 75 million shares, 28.7 per cent of United, for £33 a share: £3227m, a £3100m gain for the Irishmen in three years, according to some estimates.
Glazer, 76, from Palm Peach, Florida, made his formal bid the following day, with United and the football world still reeling. His shareholding was up to 71.8 per cent, and, now he revealed some details of the financing. The Glazers had spent £3272m acquiring their initial 28 per cent of United. A further £3265m was being borrowed from lenders led by the City financier JP Morgan, secured on United's assets. Another £3275m was being advanced by three US hedge funds in return for preference shares. A further £3109m is being borrowed for working capital and capital projects - presumably extending Old Trafford from 67,000 seats to 75,000, which the board was already planning to finance with cash.
Total cost to Glazer: £3921m. The interest on all this is, as expected, mammoth. JP Morgan's £3265m alone breaks up into seven chunks, with interest rates ranging from 2.75 per cent to an eye-watering 6.5 per cent above base. With the base rate currently 4.75 per cent, interest on just the £3265m is £331.82m a year. The devil of detail in the interest payable on the preference shares is still seeping out, but some estimates have it at £355m a year, expecting Glazer to refinance it with a more conventional, but still expensive, securitisation.
The Glazers intend, after 14 years of United being pointed to as a model football plc, to take the company private now they have over 75 per cent. They will then be able to load the JP Morgan debt directly on to United and, probably, the refinanced £3275m. Manchester United will be transformed from a proudly debt-free company to one owing five times the £3100m that felled Leeds, football's most spectacular insolvent collapse.
The Glazers have said very little about how they foresee United repaying this debt and interest. Last year United's turnover was £3169m, made up of match day revenue (36 per cent), media
(37 per cent) and commercial (27 per cent). Profit for the year, before tax and dividends, was £327.9m, way below even the £331.8m interest on just the JP Morgan £3265m.
Football is still a relatively simple business, relying, it should not be forgotten, on success on the pitch, which United are finding more difficult with a team in transition, Ferguson nearing his exit, and the emergence of Roman Abramovich's Chelsea. Supporters assume the Glazers will raise ticket prices, which United has held at £325 to £330, far from cheap but significantly lower than the top London clubs, and charge more for all other ephemera of the United experience. Perhaps the American way will explosively boost revenues, but football supporters here do have limits, and many at United are already so hostile they are vowing to boycott the club's products and those of the sponsors.
The sponsors are showing signs of nerves. Nike, which has a 13-year,
£3330m deal, publicly expressed concern about United's lack of playing success - a statement so unprecedented it is difficult to believe it is not connected to the takeover. Vodafone, too, is said to be wobbling; popular hostility is not what it or Budweiser were hoping for when they paid handsomely for an association with United's image.
It was assumed Glazer's pot of gold had to lie in TV revenues,
which are not expected to rise when the Premier League's current £31.6bn deal runs out in 2007. However, if United could escape the deal done collectively with the other Premier League clubs, and sell rights to its own games, it would make much more than last year's £333.8m. That, though, would crack the last vestige of redistribution between clubs in top flight English football and require 14 clubs to agree, which is unthinkable.
No other areas - hammering the merchandising, selling naming rights to the stadium, selling and leasing Old Trafford back - appear to offer the Glazers the scale of money needed to keep the lenders from the door, let alone ease United into prosperity.
"This takeover is disastrous," says Nick Towle, the campaigning chairman of Shareholders United, himself a corporate lawyer. "The figures don't add up."
Whenever you think this cannot be true, that nobody mounts a £3921m takeover of a company in a different continent without being certain of the figures, you return to the clear judgment of the only people so far to see the business plan - the United board. It,
so unusually, rejected the proposals even though the price was high, stating the plans were "aggressive", and likely to be a "significant financial strain on the business".
Now that the most extraordinary financial development in Manchester United's history has come to pass, we will see: does Malcolm Glazer see a pile of dollars that nobody else has spotted, or did he, as many believe, overcommit himself with his initial £3272m purchase, then drive bloody-mindedly on, with a desperately overstretched business plan?
Shareholders United is simultaneously backing a boycott of United's commercial activities, while recommending that its members accept Glazer's £33 per share. This raises the prospect of a football supporters' organisation making between £325m to £350m, which Towle says will be put into a "Phoenix Fund":
"We believe this plan cannot work,
so, when United collapses, we plan to have a powerful war chest, ready to reclaim our club."
It will be grimly fascinating to follow whether Glazer's United rises or stumbles. Should he fall, and supporters come to have a role in the future, theirs will be a very different vision from the runaway corporation of the last 15 years. They will want a little more Newton Heath, and a lot less plc, if the final reckoning comes.
Power of ten
Do you think that Malcolm Glazer could surprise everyone and make
a commercial success of his takeover of Manchester United?
Yes
Les Ross, partner in Grant Thornton's recovery and reorganisation team.
"A serial entrepreneur such as Glazer would not borrow large amounts of money unless there was a sensible way of recouping it. In 2007 Sky's agreement to broadcast all Premier League matches is up for renewal. What we may see is Glazer considering the economics of breaking away from the pack and selling the TV rights independently."
NO, BUT...
Alec Craig, senior partner, Halliwells
"Glazer's funders and advisers must have relied on a business plan - it would be interesting to see where they see extra revenues to pay the debt coming from. On the current business model it's difficult to see how they can service the debt and make investment on the playing side to be able to compete on the European stage with the likes of AC Milan, Real Madrid, Chelsea and Blackburn Rovers."
YES, BUT...
Dave Edmundson, chief executive,
Burnley Football Club
"For him, quite probably. You don't become a billionaire by applying unsuccessful business practices. For United, maybe not. There could be an initial surge, but the long-term soul has probably been lost to a grab-a-grand merchant with no football passion. His passion is money - if he has to prostitute an icon of UK sport, he cares not a jot."
DON'T KNOW
Angie Robinson, chief executive, Greater Manchester Chamber
"The takeover is too complex to give a straight answer. The main concern has to be the £3540m loan, although institutions don't give out that sort of money on a whim. I wish Glazer would say more about his intentions for the club. What the business community is keen to avoid is for Manchester to be at the centre of any adverse publicity."
DON'T care
Sir Howard Bernstein, chief executive, Manchester City Council
Sir Howard is a Manchester City fan and his answer to the question is that he "doesn't care".
HOPE SO
Andrew Stokes, chief executive, Marketing Manchester
"I have gained a reputation for a distinct lack of interest in the so-called beautiful game. But the importance of the United brand to the promotion of the city cannot be underestimated. Whatever happens, Marketing Manchester hopes to continue to work closely with the brand for positive
international perceptions of the club and the city."
YES
Anthony Wilson, broadcaster and local icon
"It shouldn't surprise us that we'll soon be leaving the socialist nirvana and will have to pay market prices for our season tickets. And I'm as unhappy about that as everyone else."
NO
Ian Currie, director, Zeus Capital
"The only logic I can see is that Glazer has gone through the barriers of buying a public company in order to sell it to another party who didn't want that aggravation. Maybe another Russian, an Australian or a major US company will move in. Otherwise the sea of debt is more than the club can stand."
YES
Phil Tarimo, regional director, corporate and structured finance, Royal Bank of Scotland
"There has been a lot of talk about the level of debt required to finance the acquisition, but if you look at United's income there is a higher degree of visibility/predictability than you might think. There is a case for the business being able to support a certain level of debt - United are currently an exception by being a plc with absolutely no debt."
NO
Gary Tipper, managing director, Aberdeen Murray Johnstone
"There's not a cat in hell's chance of him making a commercial success of it, but frankly I couldn't care less. I look forward to the day when the Stretford Red Sox are playing soccer in a half empty Budweiser Bowl against Rochdale and Altrincham in the Northern Premier League."
Also in: June 2005
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Growth 100
The big thumbs up
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Working Lunch
Harborow fair
