Thursday, July 5, 2012

It takes a Man U ...

... to focus attention on the problems with LBOs!

Apologies for the recent blogging silence - I tend to avoid subjects that get well covered by the mainstream media (who are rarely silent about anything these days).

Given the global popularity of the Manchester United (Man U) football team, I am surprised this aspect of the deal hasn't been publicised more. Please see this article on the planned IPO in the FT as background.

For those who may not be familiar with leveraged buyouts (LBOs), the $600+ million of debts that Man U owes have not financed the operations of the team in the past - this financed the Glazers for their acquisition of the Club! Thanks to the wonders of modern financial engineering and easy money policies (the same policies that indirectly at least caused the crisis that came to a head in 2008) it was possible for them to raise financing for the acquisition and to make the target (the Club/team) liable to pay off their debt. To make things worse the structure the Glazers have adopted for the IPO will give them a disproportionate share of voting rights post listing.

This may sound incredible to the unfamiliar I know but the lenders don't complain as they get a better return than generally available elsewhere, other shareholders, if any, don't complain as more debt in the financing mix increases the relative wealth of the equity shareholders (assuming the business succeeds) and the senior management (those who retain their jobs) don't complain as they have a significant equity kicker! The risk is heightened of course and that is something the other stakeholders just have to live with.

However, given the unofficial stakeholders of Man U are a global fan base I suspect the Glazers may find that they have bitten off more than they can chew here. I also think they might find it a lot easier to get their fan base to shell out a few Dollars for game tickets or caps or t-shirts for their kids than it will be to get them to buy shares in Man U. Given the size of the deal has already been reduced from $1 bn to $100m, one could argue that the deal, even if it is completed, cannot be considered a success.

One can only hope in the interest of the team and its supporters and indeed of the game of football, that the Glazers won't hold on too long and will be willing to sell at a loss once the writing on the wall is clear.

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