…Orange you glad I didn't say "Usmanov?"

Turns out Manchester United’s owner is a huge liar. Remember back in January, when ManU made the announcement that they were one of the most “profitable” teams in the history of the English Premier League? Well… they may have left a few numbers out of their calculations: £666 million numbers to be exact.

That’s the total debt that the Glazers have piled onto the club in order to acquire it. I’ll say that again, because I think it might be mildly important. “In order to acquire it.” Not to build the stadium. Not to invest in a youth program. Not to invest in the business at all. That is the money that Malcolm Glazer needed to borrow in order to buy the club.

I met a guy a few years ago. He was the proud new owner of a video rental store. I rented movies from him because he was close and cheap. (Kids: back in the old days, we used to rent movies recorded on magnetic tapes called “VHS Tapes” these “tapes” were rented by stores because we couldn’t download the movies, there was no video on demand, and there was nothing like Netflix) I think I was drunk one night and started chatting with the guy about how he was the only one ever working there and how did he get the money to open a business. A bit gosh, sure, but like I said I was drunk. Anyway, it came out that he had financed the whole business on credit cards.

Now, I’m no business guru and I’m sure that given a proper business model, one could use credit cards to open, run, and build a proper business. But you still have to take a strong look at any business that is so desperate for credit that they have to pay super high interest rates for someone to loan them money. Predictably, the Video Tape guy went out of business a few months later. I guess he’d forgotten that creditors eventually want their money back, or that at the very least you have to make the payments or they will cut you off. These creditors are smart like that sometimes.

If you read that article about Man U, there’s something in there that should send a chill down the spine of any supporter who’s club has been recently acquired through debt or who’s club is under threat of hostile takeover. It turns out that Man U owes £88m per year in interest payments but they are only able to pay £42m. The remainder of that money is being rolled into a high interest hedge fund, into which fans are paying 14% interest. Currently, that hedge fund is bloated to £152m and due to the global credit crunch, even United are unable to re-finance that fund into a lower rate. Maybe if they could make their payments they could get a lower interest rate, who knows.

I’m not saying that United is going to go out of business. I don’t know what’s going to happen to United. I do know that a lot of fans are either hiding their head right now or justifying the huge debts. I’ve even heard United fans say that they could simply “sell Ronaldo” and pay off the debt. Remember that video tape rental guy? Right before he went out of business, he sold all his video tapes. How are you supposed to stay in business if you sell all your assets?

Similarly, without Ronaldo how are you going to win trophies? How are you going to sell jersey’s? Ronaldo earns United money right now, you don’t sell your earnings, you get rid of your debt.

That’s where Arsenal comes into this story. Arsenal rang up something on the order of £300m in debt to build the new stadium. Unlike a hostile takeover, however, this new stadium is widely referred to as a “gold mine” for Arsenal as it has nearly doubled Arsenal’s gate receipts; Arsenal earn £3m per home match now. And there are some 41,000 people on the waiting list to get season tickets — season tickets which are the most expensive in the Premier League.  With these new revenues and such a large and loyal fan base, Arsenal are now also the fourth most profitable team in the world. So, Arsenal, the club, borrowed £300m in order to build an asset that will (hopefully) have a greater future return. That’s just smart business.

Once the Highbury redevelopment projects are completed, the debt on the new stadium will be paid down, and Arsenal will be the most profitable team in the world… hands down, no question about it. Which is why Arsenal have vultures circling Emirates stadium. Usmanov is currently paying double what other owners would be willing to pay for shares in Arsenal. The normal gate to share price is 1.5; Usmanov is paying 3.3 times gate in order to acquire the club. Why would he do that unless he saw a way to recoup that money? I’d say his willingness to pay such a high premium for Arsenal shares is proof that Arsenal’s board are on the right track as far as club finances.

The only problem, from a fan’s perspective, is that these are lean times. The world financial situation has been destabilized by a combination of war, a falling dollar, American lending deregulation, and speculative (foolhardy) lending and building practices. Arsenal is a global enterprise and global financial problems hit them just like all the other global businesses. Add in that the Highbury project is, essentially, a luxury condo project and you could see potential for troubling times ahead.

So, it should come as no surprise that the other day, Wenger and the club finally admitted that the transfer budget over the last few years has been slashed because of that stadium debt. Also, it should come as no surprise that Arsenal are rigidly adhering to their wage structure and thus Flamini’s departure was inevitable.

This is business 101 boys and girls. When times are lean, you keep your most valuable assets intact (Fabregas), and trim unnecessary spending (Flamini, Hleb). Despite their success in building a stadium that nearly doubles their revenue, unforeseen market forces are preventing Arsenal from fully paying that debt down at the moment. So, the board tightens the belt a little and we all have to ride out this downturn by paying more for shirts, seats, programs, television, and probably annual membership dues.

But whatever you do, you don’t panic and bust out the credit card just to put caviar on the table. I hear a lot of fans, long term fans, people I respect, saying that maybe Arsenal should trade in a few years of mid-table mediocrity for a trophy right now. I’ve heard people saying that maybe Arsenal should bring in a sugar daddy to help buy players. But I think that Man U should be a warning to us: in their case a “sugar daddy” came in and “bought” players by simply piling more debt on the team. Now, that same team can’t even make their debt payments and are rolling that debt into a larger debt that’s generating 14% interest. The “richest football club in the world” can’t pay the interest they owe on their debt?  Something is seriously wrong there.

It’s almost like some rich guy bought a football club with his credit card.

Arsenal fans should just hold on, trust Arsene Wenger, and enjoy the beautiful football. Who cares if we don’t win a trophy for 5 years? Being an Arsenal supporter isn’t about winning something today. Being an Arsenal supporter is about being part of something great, something historical, something that will always win out in the end. We don’t need Usmanov, he needs us.  Because without fans who are willing to accept a bleak future for a few shiny baubles in the trophy case today, vultures like Usmanov and Glazer can’t profit.

See you tomorrow.

5 Comments on …Orange you glad I didn't say "Usmanov?"

  1. Awesome post, am kind of a regular reader and I have lots of respect for your opinion and style of blogging……..keep it up

  2. Agreed.

    You have a great way of presenting these stories, and this one makes for awesome reading.

    I have actually made a post referring back to this story on our footie forum today. Hope you don’t mind.

  3. i love this article! terrific just like that article u did about chelsea a couple days back.

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