BECKHAM
12-05-2013, 12:32 PM
Contrary to some reports, Manchester United's New York-listed shares did not plunge on Sir Alex Ferguson's retirement. They ended the week 2.7% lower than they started it – that's next to nothing.
But they should have plunged. By conventional financial yardsticks, the club is grossly overvalued at $3bn (£1.9bn) while also carrying £368m of debt. Now that the most reliable asset is giving up front-line duties, the stock deserves to be a double "sell."
The valuation issue is basic: revenues were only £320m last year and half that sum was paid straight out as salaries. At the operating level, profits were only £44.9m. That entire sum was then consumed by finance costs of £49.5m, leading to a pre-tax loss of £4.7m. Naturally, there was no dividend.
None of which is to deny that the Glazers' financial gamble has paid off. The £800m leveraged buyout in 2005 looked reckless at the time, not least because the adventure was funded in part with those notorious payment-in-kind (PIK) notes that accumulated interest at the potentially poisonous rate of 14.25%.
But the PIKs were paid off in 2010 and the moment of maximum financial danger passed. Ferguson kept the club in the Champions League every season and collected trophies. In doing so, he made the Glazers' optimistic financial assumptions work. The current debt is clearly manageable. If the Glazers' stone-cold equity investment was £500m-ish, they are clearly going to make a big profit if, and when, they sell their controlling shareholding.
It's just that ascribing a £1.9bn value to the equity is wild. Manchester United may be the biggest football club in the world but it is not a large company. The Glazers have cranked up the commercial operation but overall revenues advanced by only 14% between 2009 and 2012. The current year has been stronger (revenues up 13% at the nine-month stage) but, for context, it will still take Man Utd 12 months to generate the revenues that Sports Direct achieves in 12 weeks.
The stock market valuation makes sense only if the Glazers can find somebody wealthier than themselves to pay the princely sum of £2bn-plus for the honour of owning Man Utd. The Premier League has become the playground of oligarchs and sheikhs, so it's not out of the question. But the task looks harder in the post-Ferguson era. His presence was almost a guarantee of glory on the field. If that guarantee is ever seen to weaken, the short list of individuals with a couple of billion to spare may become even shorter.
The mistake made by failed entrants in the pay-TV market was to try to knock BSkyB off their effing perch, as Ferguson might have put it. That was always likely to be a losing game for the likes of Setanta and ESPN.
BT's idea is smarter. Behind the obligatory bombast, chief executive Ian Livingston is clear that he is aiming only for co-existence with Sky. BT should be able to justify its three-year £1bn investment by attracting more broadband subscribers, especially from Virgin and Talk Talk. Analysts reckon one million extra customers would be a useful start. That goal ought to be within reach as BT completes its £2.5bn fibre network and pulls in viewers who want to save a few quid by living on a lower-fat sports diet. Sky will still have the gourmet sports dishes but, in a world of triple-play (broadband, TV and phone), BT's offer looks competitive in a way that Setanta et al could never achieve.
The amazing part is that BT shareholders sanctioned the TV adventure with barely a grumble. Even three years ago, it would not have happened. Livingston was still in the early stages of reviving BT after its accident in its global services division, which runs big IT contracts. His back-to-basics formula has worked wonders: costs have been slashed, service has improved and peace has broken out with the pension fund trustees. The share price has risen from 70p in 2009 to 310p now, after Friday's forecast-beating profits. The company is spitting out cash again and a £1bn investment is suddenly not such a big deal.
The worry for BSkyB must be what happens in three years' time if Livingston maintains BT's overall pace and makes a success of pay-TV. Would BT raise its ambition the next time the Premier League rights are up for grabs?
Welcome to the Co-op Group, Euan Sutherland. You thought you would be chief executive of an outfit with a challenger bank – your predecessor was full of such talk. It turns out you are actually in charge of a challenged bank.
The Moody's downgrade of Co-op Bank's debt to junk status does not imply a crisis for the bank's customers. The boasts about ample liquidity are credible and there are ways to find more capital. A sale of the life insurance business has been agreed and the general business is on the block. If the regulators decide the proceeds are still insufficient, the Co-op Group itself – the ultimate parent – would have to dig deep into its collection of supermarkets and funeral homes.
But, if that prospect is even a vague possibility, it is time for the Co-op movement to consider its role in life. What is it in business to achieve? What is it good at? Are the capital demands of running a bank now too great for an organisation without shareholders?
The 2009 merger with Brittania Building Society should never have happened. As the Moody's report makes clear, the Co-op "underestimated the risks" of a deal that brought a collection of soggy property loans and sub-prime mortgages. Nor would salvation have arrived via the now-abandoned deal to buy 632 branches from Lloyds. The Co-op would have become bigger in banking but there were "a number of challenges in terms of capital, liquidity and execution risk," in Moody's polite language.
Sutherland, who joined this month, is not a banker. He's out of B&Q by way of Superdrug. His job now is to find some banking expertise, pronto – a point one assumes the regulators have made already. His second task is to spell out to his members what being a bank entails. Peter Marks, his predecessor, used to assert that there was unanimous support within the Co-op for expansion in banking. Really? Sutherland should find out.
How to make £1m. Sir Stuart Rose, when he agreed to become chairman of Ocado in January, was given 452,000 shares as a golden hello. The value of that award at the time was £400,000 and it matched the size of Rose's purchase of Ocado shares from his own pocket. Now that Ocado's share price has started to motor (90p to 224p since January), Rose's freebie award is worth £1m. He can't bank the sum since vesting depends on his remaining chairman for at least three years. Even so, he's off to a flyer. Including the gain on the shares he bought himself, he's up about £1.6m on paper. No bad going before he's actually chaired a board meeting.
But they should have plunged. By conventional financial yardsticks, the club is grossly overvalued at $3bn (£1.9bn) while also carrying £368m of debt. Now that the most reliable asset is giving up front-line duties, the stock deserves to be a double "sell."
The valuation issue is basic: revenues were only £320m last year and half that sum was paid straight out as salaries. At the operating level, profits were only £44.9m. That entire sum was then consumed by finance costs of £49.5m, leading to a pre-tax loss of £4.7m. Naturally, there was no dividend.
None of which is to deny that the Glazers' financial gamble has paid off. The £800m leveraged buyout in 2005 looked reckless at the time, not least because the adventure was funded in part with those notorious payment-in-kind (PIK) notes that accumulated interest at the potentially poisonous rate of 14.25%.
But the PIKs were paid off in 2010 and the moment of maximum financial danger passed. Ferguson kept the club in the Champions League every season and collected trophies. In doing so, he made the Glazers' optimistic financial assumptions work. The current debt is clearly manageable. If the Glazers' stone-cold equity investment was £500m-ish, they are clearly going to make a big profit if, and when, they sell their controlling shareholding.
It's just that ascribing a £1.9bn value to the equity is wild. Manchester United may be the biggest football club in the world but it is not a large company. The Glazers have cranked up the commercial operation but overall revenues advanced by only 14% between 2009 and 2012. The current year has been stronger (revenues up 13% at the nine-month stage) but, for context, it will still take Man Utd 12 months to generate the revenues that Sports Direct achieves in 12 weeks.
The stock market valuation makes sense only if the Glazers can find somebody wealthier than themselves to pay the princely sum of £2bn-plus for the honour of owning Man Utd. The Premier League has become the playground of oligarchs and sheikhs, so it's not out of the question. But the task looks harder in the post-Ferguson era. His presence was almost a guarantee of glory on the field. If that guarantee is ever seen to weaken, the short list of individuals with a couple of billion to spare may become even shorter.
The mistake made by failed entrants in the pay-TV market was to try to knock BSkyB off their effing perch, as Ferguson might have put it. That was always likely to be a losing game for the likes of Setanta and ESPN.
BT's idea is smarter. Behind the obligatory bombast, chief executive Ian Livingston is clear that he is aiming only for co-existence with Sky. BT should be able to justify its three-year £1bn investment by attracting more broadband subscribers, especially from Virgin and Talk Talk. Analysts reckon one million extra customers would be a useful start. That goal ought to be within reach as BT completes its £2.5bn fibre network and pulls in viewers who want to save a few quid by living on a lower-fat sports diet. Sky will still have the gourmet sports dishes but, in a world of triple-play (broadband, TV and phone), BT's offer looks competitive in a way that Setanta et al could never achieve.
The amazing part is that BT shareholders sanctioned the TV adventure with barely a grumble. Even three years ago, it would not have happened. Livingston was still in the early stages of reviving BT after its accident in its global services division, which runs big IT contracts. His back-to-basics formula has worked wonders: costs have been slashed, service has improved and peace has broken out with the pension fund trustees. The share price has risen from 70p in 2009 to 310p now, after Friday's forecast-beating profits. The company is spitting out cash again and a £1bn investment is suddenly not such a big deal.
The worry for BSkyB must be what happens in three years' time if Livingston maintains BT's overall pace and makes a success of pay-TV. Would BT raise its ambition the next time the Premier League rights are up for grabs?
Welcome to the Co-op Group, Euan Sutherland. You thought you would be chief executive of an outfit with a challenger bank – your predecessor was full of such talk. It turns out you are actually in charge of a challenged bank.
The Moody's downgrade of Co-op Bank's debt to junk status does not imply a crisis for the bank's customers. The boasts about ample liquidity are credible and there are ways to find more capital. A sale of the life insurance business has been agreed and the general business is on the block. If the regulators decide the proceeds are still insufficient, the Co-op Group itself – the ultimate parent – would have to dig deep into its collection of supermarkets and funeral homes.
But, if that prospect is even a vague possibility, it is time for the Co-op movement to consider its role in life. What is it in business to achieve? What is it good at? Are the capital demands of running a bank now too great for an organisation without shareholders?
The 2009 merger with Brittania Building Society should never have happened. As the Moody's report makes clear, the Co-op "underestimated the risks" of a deal that brought a collection of soggy property loans and sub-prime mortgages. Nor would salvation have arrived via the now-abandoned deal to buy 632 branches from Lloyds. The Co-op would have become bigger in banking but there were "a number of challenges in terms of capital, liquidity and execution risk," in Moody's polite language.
Sutherland, who joined this month, is not a banker. He's out of B&Q by way of Superdrug. His job now is to find some banking expertise, pronto – a point one assumes the regulators have made already. His second task is to spell out to his members what being a bank entails. Peter Marks, his predecessor, used to assert that there was unanimous support within the Co-op for expansion in banking. Really? Sutherland should find out.
How to make £1m. Sir Stuart Rose, when he agreed to become chairman of Ocado in January, was given 452,000 shares as a golden hello. The value of that award at the time was £400,000 and it matched the size of Rose's purchase of Ocado shares from his own pocket. Now that Ocado's share price has started to motor (90p to 224p since January), Rose's freebie award is worth £1m. He can't bank the sum since vesting depends on his remaining chairman for at least three years. Even so, he's off to a flyer. Including the gain on the shares he bought himself, he's up about £1.6m on paper. No bad going before he's actually chaired a board meeting.