Long before some silvery-tongued devil rebranded corporate raiders as private equity players, they were called asset-strippers. The dubious tactics of what were once also known as leveraged buyouts (LBOs) are usually hidden from view. But the pending IPO of the Manchester United soccer club lays bare the consequences. Manchester United’s seamy tale is a small, but colorful example of what happens when a healthy business falls into the clutches of people who seize control of it by using enormous amounts of debt. The story of the depredation of Manchester United, one of the world’s best known soccer teams, closely parallels the manner in which a long list of other businesses including Federated Department Stores, Readers Digest, The Chicago Tribune, Masonite, Mervyns, Simmons Bedding, Station Casinos, and Six Flags were taken over by LBO firms, stuffed to the gills with debt and subsequently ruined.
First, a little history. In 2005, when the Glazer family of Miami, landed in the North of England, Manchester United was a publicly traded company, which was thriving both on and off the field. The club had healthy profits and was generating a good amount of cash—one of the surest measures of a well-managed business. Best of all Manchester United had enough cash on hand to eliminate almost all its borrowings. In other words, the management was in control of the destiny of the business.
All this changed after the Glazers, veteran corporate raiders who also owned the NFL’s Tampa Bay Buccaneers, took the business private and loaded it with debt. The corporate agenda suddenly changed, as it does with all leveraged buyouts. Instead of operating the business for the benefit of all its constituents—customers, employees, management and shareholders—two new groups had to be satisfied: the new controlling shareholders (in this case the Glazers) and the banks.
While the Glazers are the down-market, bucket-shop version of leveraged buyout practitioners, they followed the conventional playbook. They used very little cash to grab Manchester United. So while the Glazers like to portray themselves as “owners” of Manchester United, they are no such thing. Real owners buy and operate businesses with cash. People like the Glazers are little more than placement agents for lenders. Manchester United’s real owners—the entities that have title to the assets of the business—are now the banks.
All this is made depressingly clear in the documents accompanying the proposed IPO. While Manchester United, thanks to the shrewdness of its longtime Manager Sir Alex Ferguson, has continued its winning ways on the field, the underlying business has been ruined because of the mountain of debt shoveled onto the company. The debt load is so vast that every asset of the club—including its training ground—has been mortgaged. (The Glazers have generally declined to comment on criticism of their stewardship of Man U, talking instead about their continuing investment in the team. They have now entered the “quiet period” before the IPO and are not allowed to discuss the subject publicly).
What should fans of Man U do? Hope that the IPO will fail and that the club is eventually forced into a bankruptcy reorganization, which would wipe out the Glazers and almost certainly force the banks to loosen the terms of the mountain of debt.
During the last four years, the club has paid $792 million in interest and other finance costs, the documents show—which is more than has been spent on the purchase of players during the past 20 years. Imagine instead if that money—in the fashion of well-run publicly held businesses—had either been spent on investments in the future health of the company or distributed to all stakeholders. Instead of groaning to make payments to the banks and the Glazers, this vast sum could have been spent on further improvements to the stadium, development of enhanced broadcasting, web and digital technologies, a better global scouting and training system for promising young soccer players, the purchase of other stars, acquisitions of complementary businesses or partially set aside for the inevitable rainy day.
Today Manchester United is imprisoned by debt. The club has a further $1 billion that comes due in the next 220 weeks. This straightjacket will limit Manchester United’s ability to compete with the changing dynamics of the English Premier League. Their cross-town rivals, Manchester City, pipped them for the championship last season thanks to the firepower and limitless amount of cash of their owners, members of Abu Dhabi’s ruling family.
But things get even worse. The Glazers—like all the worst LBO characters—have been artful about taking money out of the business. They have paid themselves consulting fees, according to the documents, and taken out personal loans totaling at least $40 million. Now, with the prospective IPO, they plan to appropriate even more. Of the money the club is trying to raise by selling shares to unsuspecting American fans, $150 million, (or half the entire offering) will go the Glazers—either to satisfy personal needs for cash or, as is widely suspected, to mollify family members who are unhappy or uneasy about their exposure to Manchester United. Lumped together, this means that over $1B will have been sucked out of Manchester United and gone to the banks or the Glazers.
So what should fans of the club do? They should hope that the IPO will fail and that the Club is eventually forced into a bankruptcy reorganization, which would wipe out the Glazers and force the banks to loosen the terms of the mountain of debt. Most of all the fans should yearn for the appearance of new owners who possess an ethical compass, care about the long-term health of the business and have heaps of cash. People with those sorts of sensibilities—stewards of the future and guardians of the company—may actually deserve the label, ‘private equity’.