The Business Of

Man United | What Do They Do With Their Profits?

Morning All!

Let’s have a quick recap - on Tuesday we saw that Man United’s 2022 revenues were £583m. And then yesterday we saw that their operating costs were £693m. But hold on, if costs are greater than revenues, doesn’t that mean Man United lost money…?

Well, yes. And that’s what we’re going to analyse today! So, without further ado…

Red Devils In The Red?

The chart below shows us Man United’s net profit/loss (on the income statement) over the last 5 years. You may think that 2021 and 2022 were affected by the pandemic and you would be right. But even in 2018 - pre-pandemic - the company lost money.

So let’s see. How is a company that’s losing money, able to splash out millions, wait - hundreds of millions - every year on buying new players?

Well, the reason is because a company can have negative profits but positive cash flow. What do I mean? Well, yes, the net loss that gets reported on the income statement tells us that Man United is losing money in every year except 2019. However, this net loss figure on the income statement doesn’t give us the whole picture. Why? Because as we saw in yesterday’s newsletter, one of the largest costs on the company’s income statement is amortisation - and this is NOT a cash item.

Remember, amortisation is an accounting measure. It’s where companies spread the cost of an (intangible) asset over the lifetime of the asset. So in 2016, when Pogba was bought for £89m, Man United paid for that acquisition in cash in 2016. However, this £89m is represented on the income statement as an expense for the length of his contract (2016-2020). But no cash leaves Man United for Pogba in 2017-2020.

Therefore, to really understand how much cash Man United makes in a year from their operations, the company reports a metric known as Adjusted EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation). The ‘before amortisation’ part is what’s important for us here! And this metric gives us a better indicator of the company’s cash flow.

So as we can see from the above table, when you add amortisation and certain other adjustments (which are also not cash items) to the net loss, we can see that Adjusted EBITDA is positive. So, Man United is making cash every year! And so the very negative net loss chart we saw earlier is transformed into the much more positive chart below when we add Adjusted EBITDA into the mix!

So this is where the cash comes from that allows Man United to continue buying players! A word of caution however is that whilst Adjusted EBITDA is helpful when analysing the business model of Man United, it isn’t always a great indicator of cash for some companies. More on this in future weeks!

Reinvest Cash… Or Become A Mid-Table Side

Just before we crack on, I want to mention that the above section included some fiddly accounting stuff and so if anyone has any doubts, feel free to hit ‘Reply’ and send over your questions! We’ll be sure to get back to you.

But moving on! Okay, so we’ve seen that Man United make positive cash flow from operations. But what do they spend their cash on? As we saw from the Tesco newsletters two weeks ago, the 3 ways to use cash is by returning cash, reinvesting cash and keeping cash.

We saw that Tesco reinvest their cash by (i) increasing the automation in their warehouses and (ii) purchasing the ownership rights on their stores. These reinvestments are done with the aim of reducing costs and thus increasing the value of the business. Obviously, Man United have no warehouses or stores. So what do they reinvest in, in order to increase revenues or lower costs and hence increase the value of their business?

Well, the primary way is through player acquisition. After all, what is the value of Man United without top talent? Why are Adidas paying Man United £75m a year, when they only pay Leicester £4m a year? Why are Man United’s shirt sponsor (TeamViewer) paying them £47m a year, when Brighton’s shirt sponsor (American Express) is only paying them £8m a year? It’s all about how popular Man United are - and this popularity was established because of the success the team had on the pitch.

Just for a second, imagine if Man United stopped purchasing the best players. If instead of Fernandes, Sancho, Casemiro, etc. they went for cheaper, lower quality players. The team would win less games, slip down the Premier League table and miss out on European football. What would happen to the revenue they receive from their top customers if United became a mid-table team?

1. Premier League (Broadcasting): 2022 revenue = £140m. The team that finished 10th last year received £130m from the PL so United would lose £10m per year from the PL.

2. Adidas (Commercial - Retail): 2022 revenue = £75m. Adidas’ contract says that if United finish outside the top 4 they’ll reduce annual payments by 30% so United would lose £23m per year from Adidas.

3. UEFA (Broadcasting): 2022 revenue = £60m. A mid-table team makes no revenue from UEFA so United would lose all their revenue here.

4. Non-season tickets (Matchday): 2022 revenue = £60m. Would Old Trafford sell out every week if United became a mediocre side? Probably not and so United’s revenue may drop by £10m per year let’s estimate.

5. TeamViewer (Commercial - Sponsorship): 2022 revenue = £47m. There is no chance sponsors would pay this much to advertise on United’s shirt if the team became less successful. £47m is a huge amount relative to other shirt deals and so let’s say United would lose £20m per year from this revenue stream.

6. Season tickets (Matchday): 2022 revenue = £37m. This we imagine would be protected. The die hard fans will continue buying their season tickets. And even if a few less people wanted season tickets, the club could always put the price up to keep revenues consistent. So we don’t think there would be any loss here even if United became a mid-table side.

Adding up all those potential losses, means that if United became a regular mid-table team, they would lose over £120m in revenue per year, from the current level. Given 2022 revenues were £583m, that’s over 20% of revenues!

These figures show the importance for United to continue signing the best players and keeping themselves towards the top of the Premier League.

So, how much of their cash flow do United spend on buying new players? Well, the chart below gives us this info. And it is a pretty sizeable proportion! In the last three years, over 100% of the company’s Adjusted EBITDA has been used to purchase players.

Now, how can United spend more on players than they receive in cash flow? Well they can either fund this excess expenditure through cash or debt. As of June 2022, the company had £122m in cash on their balance sheet and so they could use this cash to purchase players. Or, the company could take on more debt in order to fund the purchase of players. However, as we’ll discuss tomorrow in the ‘Outlook’ section, taking on more debt, probably isn’t the ideal solution for United right now!

Gary Neville Doesn’t Like The Glazers…

Okay so we’ve looked at how United reinvest their cash. Now let’s look at how they keep cash and return cash. Well, given how much United spend on purchasing players, United don’t really have much spare cash to keep on their balance sheet!

However, when it comes to returning cash to shareholders, the company does distribute a dividend. And this brings many complaints from high-profile commentators including Gary Neville.

But what is he complaining about? We saw Tesco distribute a dividend to their shareholders - what’s wrong if United do? Well, the difference with Tesco is that Tesco has plenty of cash to distribute! As we mentioned earlier, United are already spending more on players than they bring in in cash from their operations. In addition, the debt pile at the company has been increasing steadily over the last decade. And so Gary Neville’s position is that the owners shouldn’t be taking cash out of United, but should instead be using that cash to pay down debt or reinvest it into the business.

In the chart above, we can see that dividend distributions began in 2016. And distributions have been ~£20m per year. Which doesn’t seem a huge amount given that the club spends on average ~£150m per year in purchasing players (reinvesting cash into the business). However, the other reason United get flak for paying out dividends is because of who those dividends go towards.

The Glazer family owns over 90% of Man United. And so when dividends are distributed, the majority of it goes to this one family. Given the protests and unrest from fans towards the family, it’s no surprise they’re annoyed when they see the Glazers taking money out of the business!

9th Mar 2023

Nigel Jacob CFA