#5: Manchester United's ownership woes - PART 2
Manchester United was flourishing even after Stock Market crash of 2002, turning profits every year. And Martin Edwards was seeking to sell his stake. All adds up for one American real estate mogul.
It’s January 26th, 2003, in San Diego, California, the 37th annual Super Bowl or Super Bowl XXXVII. Tampa Bay Buccaneers come out on top defeating the Oakland Raiders.
For those unaware, Super Bowl is America’s biggest sporting event of the year. It is the Finals or the Championship game of the NFL (National Football League). The winner of this game is the champion of the biggest professional sports league in the world.
The champions Tampa Bay Buccaneers happened to be owned by one Malcolm Glazer.
SOME BASIC BACKGROUND:
Malcolm Glazer was an American real estate mogul. He had humble beginnings though. At the age of 8, he joined his father’s watch repair business. He took over that business at the age of 15 when his father passed away. He later started investing in residential properties — duplexes and complexes, before eventually moving to corporate real estate. He also started buying majority shares in companies such as Formica, Harley-Davidson, Zapata Corporation (the oil and gas company that was founded by George H. W. Bush). His investment portfolio included a variety of operations such as restaurants, oil and gas, broadcasting, nursing homes etc.
Then came another investment that made his portfolio more diverse. In 1995, he purchased NFL franchise Tampa Bay Buccaneers for a then-record price of $192 million. It was an odd choice considering Buccaneers had been very unsuccessful in the NFL since the early 1980s. Some organisational adjustments and Glazer reaped the fruits when the Bucs finally won the Super Bowl in 2003. After which he said, “If you haven’t heard about them, you’ve heard about them now”. It was a rare public appearance, especially in the little sports world he had created for himself.
Now, he wanted to expand his sports franchise empire. He sets his sights on the booming Manchester United (thanks to Martin Edwards). Manchester United was quite a lucrative investment choice for Malcolm Glazer. Britain’s leading share index, FTSE (Financial Times Stock Exchange) crashed in 2002 due to several tensions. Despite this crash, United’s stock didn’t bear much of the brunt. Manchester United PLC was making profits and was debt-free. In the past 30 years, United had made over $400 million in pre-tax profits. To top it, its shares had been trading at a low price at the time, which made it easier for Glazer to buy. Martin Edwards also began selling his shares slowly and steadily. Glazer started his quest to buy Manchester United. He began acquiring United quietly, few shares at a time. Glazer purchased the shares through his holding company - Red Football. He crept his way to the majority holding by the end of 2003. This is how much stake he had by the end of :
March 2003 - 2.9%
September 2003 - 3.17%
October 2003 - 8.93%
November 2003 - 15%
February 2004 - 16.31%
October 2004 - 30%
Now, Glazer (Glazer family) had to offer the other remaining shareholders a price at which they would have to sell their entire shares to the Glazer(s) according to UK Law. This is what the UK law says:
When a person or group acquires interests in shares carrying 30% or more of the voting rights of a company, they must make a cash offer to all other shareholders at the highest price paid in the 12 months before the offer was announced (30% of the voting rights of a company is treated by the Code as the level at which effective control is obtained).
Fans were enraged due to many reasons - ranging from ‘the danger of Old Trafford being sold/ naming rights being sold to corporates’ to ‘the danger of the team being Americanised, which wrought the danger of eventually the whole league being Americanised’. Usually, American sports leagues have all this pomp and glamour, try to rake in huge money from brand sponsorship deals, and biggest of them all - every team competes every year no matter how poorly it performed in the previous season. While European sports (esp. soccer) focus more on tradition and glory, and not so much on the money. And - a poor performance from any team in a season would have a penalty of relegation. The bottom three teams in every soccer league are relegated to the immediate lower division.
My favourite example of the difference between European and American sports cultures - In 2017, Wimbledon, which is held in England raised around $47 million from sponsorships. While the US Open garnered around $65 million. The reason is as I said above. Wimbledon doesn’t let any logo be placed on the Centre Court, to preserve its aesthetics. While US Open wouldn’t leave a chance or a place to stamp as many logos as possible. Brands get maximum exposure, US Open squeezes out maximum money from them. (And I don’t mean to establish that one is better than the other. Both systems have their own values)
By the end of 2005, Glazer and his six children had acquired a total of 98% of Manchester United. In the process, they had to loosen up their purse strings to the tune of around $1.3 billion. Red Football now owned Manchester United. The fans were furious. So much so, that they welcomed the Glazers with passionate "Die, Glazers, die!!" chants and sign-boards. Stickers saying "LOVE UNITED, HATE GLAZER" were all over Old Trafford. The Glazers had to be escorted by the police to ensure their safety.
WHAT SPARKED THE ANGER AMONG FANS?
Sure, there was a risk the fans felt that the game might never be the same before as soon as Americans come to the scene. In the process of buying United PLC, Glazer was able to delist it off the London Stock Exchange. But there was one actual, more visible problem - Debt. The Glazers did something very shrewd. To fund their purchase of Manchester United PLC, they had taken a loan of £265 million from several banks led by JP Morgan. But, here is the catch. The debt was secured against United’s assets. Meaning, it was essentially United who was in debt - their first one since 1931. To that, add £275 million in Payment-in-Kind (PIK) Hedge Fund loans/bonds at an initial rate of 14.25%.
Payment-in-kind are high-risk, high-reward securities. They were a popular form of lending in the mid-2000s, where the borrower usually used to be a person or entity who wanted to take over an existing company by buying all the shares. PIKs don’t demand annual interest payments, the interest just accrues year after year. But, the dangerous part is that interests get rolled over and adds on to the debt principal amount. It is more like compounding debt. So, interest may not be paid, but it will keep on adding up as principal in event of the yearly non-repayment. The lender is fine with it, as it maximises the gains. In simpler terms, any interest not paid by the borrower (that is due to be paid to the lender) is treated as a further loan extended by the lender. The lender gets the cash in-flow of the whole repayment (interest and principal) at the time of maturity of the loan. For an even better understanding, check out this example here.
After a certain deadline, the interest rate rose from 14.25% to 16.25% in 2010. The debt peaked at £778 million. Over £500 million were raised through additional bonds. The club was further floated on the New York Stock Exchange (NYSE: MANU). The ticket prices were raised by as much as 30% between 2006 and 2009 (£494 to £665). By the end of 2015, the ticket price was £705. As a result, by the end of 2015, the debt had come down to £380 million. Malcolm Glazer died in 2014, after which, reigns of the club were handed over to his sons. By the end of 2019, debt was almost under £200 million before the pandemic came and made things worse as the debt crossed £440 million. (Source: This wonderful thread by @SwissRamble)
Fans are still angry. They want nothing more than the well being of the club they are so deeply connected to. Football club fans are a community in themselves. So, when they see so much in-flow of cash, they want and expect that cash to be utilized for the betterment of the club — for acquiring players, improving training facilities, maintenance of the ground. What they least want is the cash being used — to pay towards the interest payments for the loans that were taken for the leveraged buyout of the club itself in the first place and to pay unnecessary dividends to shareholders. Heck, the cash was being raised through the increased ticket prices. If there were still some fans who didn’t already hate Glazers, I am sure they would have changed their mind after this.
Cut to today, the debt of Manchester United is still around £443.5million. Sure it has been worsened by the pandemic, but it was ugly before the pandemic. And even in the financially-compromised, pandemic-ridden year of 2020, Glazers made sure to pay themselves despite the ∼18% revenue shortfall. $30 million in dividends were distributed to the shareholders, the majority of which went to six Glazers, who hold majority of the club.
The Glazers don’t want anything to do with the club’s on-field performance, which clearly shows from the lack of spending made or even tried to be made on acquiring good players. Instead, they are in it for the business. Fans, on the other hand, don’t care about Football - the business. They want their club to do better through investments in the club - on players, on training facilities, on the stadium etc. And it makes sense. But owning a football club to earn profits and treat it as a business doesn’t. To be honest, no one buys football clubs to make money. People buy it to promote good soccer, win, make-and-break records, and win championship hardware. Yes, the aim is to maximise the in-flow of money into the club, but to in turn spend it on the club itself; not for personal profits. As an anonymous club chairman in British Commission on Industrial Relations report in 1974 said - “Any club management which allows the club to make a profit is behaving foolishly.”
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