I have watch premiership soccer since I was 13 years old and while it still grips me today like it grips me 17 years ago, much has changed.
More money is flowing into the game and the game is becoming more commercialized. The end result is that much more is at stake other than result on the field. Off-the-field results are as important as well.
As a Manchester United fan, probably the most consistent news about the club have been how the owners (The Glazers) are screwing the club up by doing a leverage takeover in 2005 and laden the club in massive debts that will only be detrimental to the soccer team.
My take on this is that a leverage takeover is not always bad if the management brings expertise and additional value added benefits (stability, off-the-field commercial results, youth development). However, from past records, most leverage buyouts like this ends badly.
In this analysis I contrast the latest financial results against another good Premiership soccer club that has taken on debts for very different reasons – Arsenal.
Comparing and contrasting is not to say which club is better but it will be interesting to contrast the mandate of each club and operationally how their performance differs.
Revenue and Net Profit
Comparatively, revenue improve 2.8%. operating expenses however increase 1% only. This is good since it means operating margins are improving.
Match Day Revenue is rather comparable between Man Utd and Arsenal. Media Revenue is higher for Man Utd due to further progress in Champions League and EPL.
Much have been said about the Glazer’s being commercial savvy with the ability to improve the revenues commercially, but a look at the statements show otherwise. In the case of Arsenal, commercially and off the field they did much better due to 156 mil made in property development. Do note that these property development revenue can come and go but it shows that other club owners are able to monetize their club’s fixed assets and brand assets as well.
Compare to last financial year, the club did not make significant profits from player disposable. Last year Cristiano Ronaldo is sold for 80 million. This year the total sales only amount to 12 mil.
The interesting I see here is that whenever you buy a player, its cost will always be spread out over (see depreciation and amortization) the number of years of the contract (Say 5 years for Rooney) but when you make a sale, its one lump sum revenue. This means that on the income statement it always look more favorable for the club.
In contrast to Arsenal, our player additions and sales have been rather comparable with them. Arsenal have always been known to sell their players for a good profit.
So which club has a better future opportunity for profit growth?
On the field, I rate both teams equally in their ability to progress to later group stage and be in the top four in the EPL.
It is important for the club to be a success on the field because really, if you are not in the top 4 of the EPL, you don’t get into the Champions League you lose like 80 mil in revenue. That’s abit farked.
As we see later, Man Utd needs this probably more than Arsenal due to their interest expense commitments.
Commercially Man Utd is monetizing their brand much better off the field, however Arsenal is no slouch as well.
Soccer Brand is a very important intangible asset as it enables a soccer club to get commercial deals and tie-ups. Soccer Brand is build through having History, Success on the Soccer Field, Marketing.
Management plays an important part as well. This is where we hope the Glazers add value when they take the club private.
Did the glazers add value? A look at operating profit divided by total assets shows that the operating return on assets for Man Utd is only 0.93% (not even 1%!) while for Arsenal it’s a respectable 8.16%.
What does this yield mean? For 1 dollar of Asset Man Utd generated 0.0093 cents of operating profit while Arsenal generated 0.08 cents. It must be argued that had Arsenal not made so much from property development they could look worse but kudos to Arsenal for doing well commercially.
My opinion is that glazers sucks when it comes to improving the club’s operating performance.
In terms of player sales, it is always gonna be sketchy. Arsenal have a greater propensity for revenue stream from player sales ( not exactly always a good thing) while Man Utd do not traditionally monetize this area well.
It all depends on who has the greatest value of soccer player assets. My take is probably Arsenal as their youth supply chain is providing the highest value assets as good passing attacking players command better value than players in other positions. In terms of current crop, Man Utd is great because their total team value is higher than their sum of parts, but if you split them up to sell, Arsenal probably have the more valuable individual players.
Overall, if I look at adding value to shareholders, Arsenal is the better investment.
Cash level, Debts and Assets Analysis
Compare to last work year, cash holdings actually improved from 150 million to 163 million.
Total Assets grew from 1.193 billion to 1.574 billion. The biggest change was the increase in Debtors within one year from 278 mil to 675 mil. I still have not made out what is this actually.
Essentially, operating at nearly 10% cash of total assets may pale in comparison in the past but truthfully, cash is sitting idle so keeping too much cash might not be a good idea if you look from the share holders’ point of view. However, from the operation point of view, cash is important since, cash gives you flexibility to take advantage of opportunities (in the case if Cristiano Ronaldo suddenly goes in the market for 20 mil) to purchase enhancing assets.
To get more cash, soccer clubs will have to generate greater Free Cashflow. That is probably the lifeblood of a well run company in my opinion. We will take a look at it in the next section.
A lot of people commented about the debt position of Man Utd but a debt/asset ratio of 35% is really not very very dangerous. In fact, Arsenal have a higher debt/asset ratio at 38%.
Free Cashflow, Depreciation and Interest Expense
This is probably the most important section for me in any financial statement. Cause it tells me where all the freaking cash goes to.
Particularly, we look at how much Free Cashflow is generated.
Free Cashflow (FCF) for a soccer club in general:
FCF = Net profit + Depreciation and Amortization – Interest Expense – Capital Expenditures
It is probably important to make sense of depreciation and amortization. These 2 items count as expenses in the income statement, but might not result in eventual cashflow out of the soccer club.
- Depreciation – Expensing Assets such as property and equipment across their usable years. It is recurring every year. This does not take out cash from the soccer club now.
- Amortisation of players’ registrations – Probably with good will makes up the largest portion and it is recurring every year. However, it is already paid years before when these players were initially acquired but are currently expense every year to reflect the usability of these players over the duration of their contracts. This does not take out cash from the soccer club now.
- Amortisation of good will – Expensing the above market valuation that the Glazers paid for the club last time. It is recurring every year. This does not take out cash from the soccer club now.
As this is cash not taken out from the soccer club, it is added back to the Net Profit. Thus we arrived at an amount of 103 mil for Man Utd in 2010 and 176 mil for Arsenal in 2010. Here you will see that Man Utd have a large depreciation so in terms of operating cashflow they are in a better shape then if you view their income statement. Arsenal, due to their good profits and although smaller depreciation are in a good operating cashflow position.
We then subtract the interest and capital expenditures from this operating cashflow to get the Free Cashflow.
Interest Expense is the interest paid on taking on 551 mil and 283 mil debt for Man Utd and Arsenal respectively.
Here we see that interest expense even after one round of re-financing are trending up. The Glazers do not have a choice but to re-finance at a higher cost. This is really bad for business. You re-finance most of the time to take advantage of more favorable interest rates. In the case the Glazers are just inching up the debt and the interest paid.
In the case of Arsenal, they have been gradually paying down their debts so their interest expense are reducing gradually. We still don’t see the glazers doing that. Perhaps the reason is that they do not have excess Free Cashflow to do that.
The interest expense as a percentage of total debt is higher for Man Utd at 10% compare to 6% for Arsenal indicating much higher cost of capital.
Capital Expenditures (CAPEX)
Capital Expenditures is the equating factor to balance up the depreciation. Players get old or not that productive as time goes by, you will always need to invest in new players, better players.
It then adds (or in worse case subtracts) value from your team or the soccer club as a whole.
In terms of CAPEX, Arsenal most of the time are in a better position as they focus capex on cheap younger players that appreciates in value after in house development and shuns from buying expensive players. You can say that they are not seeing the results on the field, but it makes a lot of financial sense
Imagine getting a player for less than 1 mil and selling it (Wilshere and Fabregas probably in 20 mil bracket)
Man Utd have tend to be net buyers of players instead of sellers. They tend not to make much from player sales, compared to other clubs, but not selling enhances your club’s values and income in other ways particularly in Marketing and On the Field Progression.
To conclude this section, FCF for Man Utd is a meagre 11 mil without the massive cashflow that Cristiano Ronaldo brought in. Arsenal has a healthy 152 mil.
FCF can be used:
- Repay existing debts
- Add to cash holdings for future investments (players or otherwise)
- Pay out to shareholders
Right now Arsenal can probably pay down its debts. They paid down 135 mil in debts this financial year. Man Utd cannot do that.
Based on current FCF,
Arsenal will take 283/152 = 1.86 years to pay off all their debts.
Man Utd will take 551 / 11 = 50 years to pay off all their debts.
Arsenal probably adds little back to their cash holdings, but at least they are doing one thing. Man Utd isn’t even doing any of the 3 items since they don’t have it in the first place.
Which club is in a better position?
Interest Expense – Arsenal after paying down debts, probably will have a smaller future interest expense. Man Utd will likely pay more interest expense. This would eat into their free cashflow.
Capital Expenditure – Man Utd currently is facing a stage where their player’s future potential depends a lot on their current crop of youngsters. But the main problem is they need an investment in 1-2 good midfielders for the long term. This will increase their capital expenditure. Their manager tends to be very bad at picking value buys in this area. If it doesn’t work out they look to spend more.
Arsenal have a very good crop of players in most positions. They are reaching a stage where their productive lifespan is long (Ramsey, Wilshere, Walcott e.g. are still in early 20s or below that.) They will still continue to invest in young players, develop and add value. Capex should still be small.
Operating Cashflow – Both are pretty similar. But should they not enter champions league or do badly in the league for one year, they will not have the cashflow.
Overall, perhaps Arsenal are in a better position.
It is interesting to compare 2 clubs taking on debts for very different reasons but in the end it boils down to operations and the direction the club the owners envisions.
The conclusion that I can draw from this is that Arsenal’s position will only get better. Future looks bright even if they don’t win the Premiership or Champions League. They will just need to stay in it.
Another 2 years of good results like this past year and they can pay down the 283 mil in debt.
The same cannot be said about Man Utd. Interests payments commitments is so important that should they not get a good result in the Premiership or Champions League they sink deeper. Right now the Champions league is what I see used to pay for the interest payments.
Taking on debts is not always bad, but we want to see the Glazer’s add value in other operation areas. The return on asset results show that Glazers are adding more assets but not generating the required returns. If the results are still not satisfactory, they will probably take a long time (50 years?) to clear their debts.