EPL European transfers complicated by Brexit pound worries

Paul Pogba after his world record transfer to Manchester United. Credit: SkySports

Foreign exchange risk is an ever present concern for global businesses with large financial commitments outside their home borders. Whether paying suppliers or bringing back overseas earnings the risk of changes to the final price changes because of currency fluctuation is a risk of operating overseas.

Managing FX risk has not traditionally been a concern for soccer clubs who, despite their global audiences, conduct the majority of operations in their home currencies. This has begun to change as clubs reach further abroad for licensing opportunities with global partners and international player transfers. With the latter presenting the risk of obligations in a foreign currency.

English Premier League clubs have been able to control this risk thanks to strong bargaining power that stems from two factors: being members of the world’s most marketable league and doing business in a stable international reserve currency. Unfortunately, last year’s Brexit vote seems to have thrown at least some doubt about the latter with Cliff Baty, Manchester United CFO saying that the uncertainty added in complexity for player contracting.

From the FT:

“It was a bit difficult last year when we were trying to make signings and you had players questioning the value of being paid in sterling,” he said.

“A lot of European players will want to be paid in euros, understandably to a degree. But we are a sterling company . . . [and] managing that is quite tricky.”

The biggest clubs are hedged against currency movements, earning euros from playing in European competition and dollars from international sponsorship deals. Even so, Mr Baty said his club does not have enough euros in hand to accede to the request, insisting players be paid in pounds instead.

Players looking to be paid in euro rather than sterling is not an earth-shattering change but still a reminder that the industry is subject to the same concerns as normal business.

EPL European transfers complicated by Brexit pound worries

Manchester United account refinancing of senior secured debt

Manchester United has announced a refinancing of the club’s debt, the notes were issued by MU Finance plc, a subsidiary which houses the clubs financing. All outstanding 8.375% senior secured notes due 2017 to be redeemed with funding provided by issuance of new 3.79% senior secured notes due 2027.

The original 8.375% notes were issued as part of the clubs 2010 refinancing, in which the club refinanced approximately $675m of which the notes represented approximately $425m. The Glazers’ contentious leveraged buyout of the club layered an estimated £600m in debt onto the club in 2005, with the interest rate peaking in 2010 at 16.25% due to a default. Since then the Glazers have been able to take advantage of the loose credit environment and gradually refinance the debt to much more manageable rates.

Redemption of the old notes is contingent upon the completion of the new note issuance. The club expects the transaction to close around June 26, 2015 and reduce net interest payments by ~$10m a year.

Manchester United account refinancing of senior secured debt

Manchester United kit deal depends on Champions League

Earlier this month Manchester United announced the largest kit supplier contract in history, with the club receiving a massive £75m (~$125m) annually from soccer giant Adidas.

Today Mark Ogden of The Telegraph reports on some of the more intricate details of the partnership related to the club’s UEFA Champions League status. United must find their way back to the Champions League by the end of the 2016-17 season or face a 30% reduction in the Adidas payments. Specifically, the clause will be triggered if the club fail to qualify for the CL in two consecutive seasons beginning from the 2015-16 season.

In a situation where the club is unable to secure a spot in the competition Adidas’ annual payments would be reduced from £75m to  £52.5m. Other clauses contained in the contract include a £4m payout for any win of the Premier League, FA Cup or Champions League and a 50% reduction in the contract should relegation occur.

The lucrative contract shows the extent to which Adidas is willing to pay for a global brand like United, but also how it does so in a way that controls for volatile league and tournament performances from its club partners. Given the increasing sophistication of branding partners it seems likely that performance based contingencies are going to be increasingly common in licensing agreements.

Manchester United kit deal depends on Champions League

Manchester United’s New Deal Era

Manchester United have announced a new kit partnership with soccer sportswear behemoth Adidas, ending their association with Nike. The new relationship will see United receive a staggering £75m (~$125m) annually, a sum that far eclipses the £23.5m per annum from the previous deal. In exchange Adidas will hold the exclusive right to distribute United branded products worldwide.

To put the economic impact of United’s new shirt deal into perspective consider that  Wigan Athletic’s gross revenues in the 2012/13 season were £58m. Manchester United’s shirt brings in considerably more money than an entire club playing (at the time) in the same tier. The figure is still stunning compared to the £126m in revenue made by an average EPL club.

Kit Deal ComparisonSo how does the shirt deal stack up to other clubs with comparable branding?

The new kit more than doubles the next closest deal, Real Madrid’s  £31m a year kit (also Adidas). Arsenal’s newly minted Puma agreement hints at higher values to be had in the coming years but the gulf between United and the rest of the pack  speaks to the depth of the club’s support around the world.

The Adidas deal is the perfect capstone for a year in which United have demonstrated their commercial might, announcing numerous partnerships with companies around the world in product categories from snacks to diesel motors. With the club losing its place in the 2014/15 UEFA Champions League and the resulting TV revenues, the Devils’ sponsorship platform is a vital source of revenue growth that the club will rely on to strengthen a weakened squad and build what it hopes will be another golden generation.

Manchester United’s New Deal Era

The Month in Soccer Business: September 2012

A monthly compilation of interesting business news related to soccer. September 2012.

Transfer spending rises in England, France and Germany September 3rd

Spending in the summer transfer window has increased year-on-year in England’s Premier League, France’s Ligue 1 and Germany’s 1.Bundesliga, but has reduced in Italy’s Serie A and Spain’s Primera Division, according to analysis by Deloitte.

The business advisory firm said that player transfer spending by Premier League clubs was around £490 million in the 2012 summer window, marginally up from the £485 million spent in summer 2011 but just short of the £500 million record of 2008. Transfer fees to overseas clubs were around £300 million, almost 50% up on the level seen in 2011.

Full Article >> Soccerex

Manchester United chief executive David Gill will put club allegiances to one side if successful in bid to represent England on Uefa board – September 4th

Manchester United chief executive David Gill will put his club allegiances to one side in his bid to represent England on the board of UEFA.Gill will stand for election as the Football Association’s nominee to the influential 16-strong body that decides on the European football governing body’s policies.

An election will be held at the UEFA Congress in London next May when all the 53 member nations will each have a vote.

Full Article >> The Independent

Continue reading “The Month in Soccer Business: September 2012”

The Month in Soccer Business: September 2012

Manchester United IPO moves east (again), cuts deal size 90%

Manchester United Football Club has filed a registration statement with the United States Securities and Exchange Commission (SEC) for the sale of up to $100m worth of securities. The Glazers had been pursuing a listing on the Singapore Exchange for the better part of a year but their focus seems to have shifted to the American market.  The club disclosed a planned listing on the New York Stock Exchange on July 3rd.

Part of the reason for the journey eastward is likely the better performance of the US markets relative to any of the alternatives.

This past year the London FTSE and Singapore EWS have fallen by about 5% and 9% respectively, whereas the S&P500 has gained 2%. Instability in the European and Asian regions is a likely impetus for the Glazers to move the offering to the (relatively) calmer United States.

But aside from the change of venue the most significant (and surprising) detail of the new listing is the reduced deal size. A year ago the Glazers were targeting an ambitious $1bn (£641m) raise to reduce United’s debt load.  A $100m (£64m) deal represents a 90% reduction from that original target and a far cry from the original pay down of the remaining $648m (£416m) debt that supporters were hoping for.

So with the offering unlikely to take a significant bite out of the long-term debt load what is the motivation? Simply put United needs cash. Now. The latest cash flow statement for the years 2009-2011 is below:

I will save a full-on analysis for another post, but a quick eyeball tells us that financing and transfer costs are sucking up most of the cash the club is producing. The repayment of the Payment-in-Kind (PIK) loans in 2011 was an extraordinary event which significantly drew down cash balances as accrued unpaid interest on the notes was settled. After a busy 2012 transfer window and some disappointing performances United’s cash balance has been further drained to a mere $39m (£25m) as of March 31, 2012.

If we look at the contractual obligations of the club in the next four years United has approximately $382m (£245m) worth of obligations to fulfill:

The Long-term debt obligations remains the largest category but Purchase obligations (deferred payments on players) is the second largest cost and is likely to increase as the club continues to invest in new players.

Bottom line? A $100m (£64m) raise is probably the bare minimum the club needs at this point to handle financing payments, investment in club facilities, and squad rebuilding while maintaining a comfortable cash cushion. Regarding the choice of a US listing, stability and prospect of market performance was a factor but the decision was also likely affected by the change in deal size. Unable to get a larger, single shot offering done in Asia the club is likely to try smaller offerings over a longer period of time, a strategy which requires access to the much deeper capital markets of the US.

…It is probably also to the Glazers liking that, should the need arise, their ownership in United can be cashed out in their home currency of USD.

GBPUSD Rate throughout this article = 1.5598

Manchester United IPO moves east (again), cuts deal size 90%

Why You Shouldn’t Take The Forbes Soccer Valuations Seriously

The 2012 edition of the Forbes Soccer Club Valuations are out. You may recall that I am not a huge fan of them so I thought I’d take a post to cover more in depth why I am incredibly dismissive of this annual list.

Forbes Rankings

Forbes does a number of lists which rank various aspects of the financial world, from the richest people in the world to the most valuable companies, this includes soccer clubs. To do this the magazine throws available financial data, its own research, and some expert opinions into a black box shakes it around and out come values for clubs. Simple enough right? When you look at the ranking the list is populated with familiar names and the order looks about right:

Forbes 20 Most Valuable Soccer Clubs - 2012

Wikipedia has a good compilation of the rest of the Forbes Soccer Club Valuations since 2007. So what’s the problem? Continue reading “Why You Shouldn’t Take The Forbes Soccer Valuations Seriously”

Why You Shouldn’t Take The Forbes Soccer Valuations Seriously