Manchester United opens window on murky world of leveraged buy-outs
For a glimpse of the murky world of leveraged buy-outs (LBOs), look no further than the team atop the Premier League. What's happening to Manchester United football club is similar to the same fate that has beset many US and European companies that have been taken over by LBO firms. Last week Manchester United officials were able to secure a badly needed refinancing of the £500m of debt assumed after the club was taken private. If you want geese that lay golden eggs just stop choking the goslingsWebmission pilgrimage to Silicon Valley proves lucrativeTech stocks wave goodbye to the good times againFive years ago, before the Glazer family of Florida completed their assault on Manchester United, the football club was a thriving, healthy business. The club had plenty of cash, was free of debt and had the firepower to invest in the future. The Club's football management - headed by Sir Alex Ferguson - had spent two decades carefully creating a franchise, much as chief executives and entrepreneurs diligently build companies. All that work was put in jeopardy after the Glazers approached Manchester United. In 2005, after enduring waves of mounting pressure, Manchester United's board of directors - while loudly warning shareholders of the probable consequences - sold the club for £790m. But, instead of paying with cash, or with a small and manageable amount of debt, the Glazers slammed a massive mortgage on Manchester United and leveraged it to the hilt. Substitute the Glazer family with the names of LBO firms and Manchester United with the names of numerous corporations and you can see what could happen. In the US we've watched the LBO firms, calling themselves "private equity", burden companies. They take over businesses that in some cases employed tens of thousands of people, formed the heart of many communities and had been steady and reliable taxpayers. These are companies such as Readers Digest (bankrupt), Simmons Mattress (bankrupt), Mervyn Stores (bankrupt). Virtually no industry has been able to escape the pursuit of the LBO firms. Supermarket chains, theme parks, gambling casinos and building suppliers have all fallen victim to the LBO treatment. Here's how the Glazers treated Manchester United. They replaced the board of directors with family members. They buried the club beneath several increasingly expensive layers of debt, which in the last three years have cost Manchester United £130m in interest payments - more than five times what the club received after selling David Beckham to Real Madrid. They took money out as onetime payments, loaned money to themselves at favorable rates and charged the club management fees. And now they are about to sell Manchester United's training ground and lease it back to the club. If Sir Alex Ferguson wants to buy new players, it seems the club will have to assume even more debt. Across the US the buyout firms have perfected the business plan. A buyout firm spots a company with a healthy business. Boards of directors are tossed aside; assets are pledged; employees are fired; pre-before tax becomes earnings before interest, tax, depreciation and amortisation; all the energy turns from building a healthy long-term business to servicing the creditors. Who benefits from all this? In the case of Manchester United it is certainly not the fans - the customers; the players - the employees; or the management -Sir Alex Ferguson and his staff, whose opportunity to share in the increase in equity value they built was flattened when the club was taken private. The beneficiaries have been the Glazer family and the bankers, lawyers and accountants. (Just the banking fees for last week's bond offering equates to more than half of what Manchester United paid for Wayne Rooney). When will all these people who act like sub-prime landlords have the decency to abide by a few simple principles? Don't buy what you cannot afford. If you buy something, use your own cash. Reward the people who have built the business. Put earnings in the bank or invest in the future. And, one final thing, never confuse borrowers with owners.
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