Holmes: Man U debt serves as cautionary tale for MLS

As more than 60,000 soccer fans pour into CenturyLink Field for a friendly between Sounders FC and mighty Manchester United at 7 p.m. Wednesday, it’s fair to say that such a soccer dynasty will never happen in Major League Soccer — and quite likely never again in the world.

Why? The global appeal of Manchester United is based on “romance,” in the view of the club’s longtime coach, Sir Alex Ferguson. The estimated 333 million worldwide supporters love ManU because it plays a fluid, attacking style. In other words, the way it plays is easy on the eyes.

Manchester United also pioneered a business model that catapulted the team’s brand into the stratosphere and earned it hundreds of millions in profits annually. All the while, the club prudently managed player salaries, never letting them exceed total revenues. Until U.S. tycoon Malcolm Glazer bought ManU in 2004, the club was debt free and a stock-exchange darling.

The story of Manchester United’s business skill was as compelling as its skill on the pitch — a rare example of blending style with economic sensibility. The club did it in the most irrational industry of all — the world of sports.

ManU will be showered with affection in Seattle and elsewhere on its U.S. tour, and it remains strong on the field. But its business story is no longer compelling. In fact, serves as a cautionary tale for the MLS, odd as that may seem.

When the Glazers bought ManU, they ultimately saddled the club with $1.17 billion in debt in order to purchase the public shares and take the team private. In doing so, they ignited a severe backlash among supporters that continues to this day. The club continues to raise doubts about how it will service the debt. This has spawned several attempts by wealthy local groups to try to buy back the team from the Glazers. The business issue will continue to be the dark motif to an otherwise mostly favorable story line.

For the MLS, the model is economic survival. A $2.5 million salary cap per team, centralized league control– known as a single-entity structure — allows the league to control costs. This model has stifled the romance but has kept the league alive as it has struggled to grow in America.

This was necessary and should be applauded — to a point. Now, as the MLS has TV contracts, sponsorships, soccer-specific stadiums and continues to attract new fans and new teams, it’s going to have to change its model. It’s going to have to embrace the romance of the game.

But that is is a tricky intangible. If mismanaged, it can bring the club, or league, disaster. That’s what happened to the defunct North American Soccer League, and that’s what could happen to Manchester United.

Romance costs enormous sums to produce. The average MLS player earns between $50,000 to $70,000 annually. The average English Premier League player rakes in about $1.5 million — not including incentive bonuses. Manchester United star Wayne Rooney’s annual salary is bigger than the combined player salaries of three MLS teams.

The exception is the league’s designated player rule, which allows teams to skirt the salary cap for up to three players in an effort to attract premier, veteran players. The most well-known example is LA Galaxy’s David Beckham, who earns about $5 million annually.

Manchester United developed a model that supports high salaries. The club, which has always drawn local supporters to its 1910 stadium (capacity: 76,000) even when it was relegated to the second division several decades ago, pioneered the development of revenue streams beyond ticket sales.

In the 1990s, Manchester United was the first to promote its jersey sales beyond Manchester and England. It started offering supporters various insurance products, home mortgages, credit cards and consumer loans, along with scarves, tea cups, bed sheets and other branded retail knick-knacks.

It was one of the first soccer clubs to be listed on the public stock exchange in 1990. It also pioneered pre-season world tours to Asia and eventually to America in an effort to enhance its brand and worldwide appeal.

The business model followed the success of the team on the pitch. Ferguson took over a listless club in 1986 at a time when Liverpool dominated English soccer. But by the early ’90s, Ferguson had turned the teams and was winning nearly countless trophies. He insisted his teams play attractive, attacking soccer.

Investors bought up shares viewed as a boutique buy, but also based on the club’s insistence that it match player expenses with revenues. From 1990 to 2004, Manchester United was debt free and considered to be the most financially responsible football club in the world.

Fans continued to do their part: they filled the seats, bought replica jerseys and travel insurance while using ManU credit cards. Sports companies such as Nike shelled out tens of millions to sponsor the team, as did non-sports companies such as AIG, which paid to put its name on the front of the ManU jersey.

Forbes Magazine values Manchester at $1.8 billion. It reported revenues last year of $394 million and net income of $111 million. Forbes ranks it the No. 1 franchise is all of world sports, a distinction that rivals Real Madrid and Barcelona may dispute.

But ManU’s blissful world was shattered when the Glazers, who own the NFL’s Tampa Bay Bucs, bought the club in 2004. The Glazers borrowed up to $1.1 billion from hedge funds through various revolving financial mechanisms to buy out shareholders and take the company private. This created riots among fans and death threats against the Glazers, driving  a deep wedge between the fans and the owners.

Ferguson’s popularity, and support for, the Glazers was probably the only reason ManU didn’t suffer further financial damage from the threat of supporters refusing to renew their season tickets. For several years following the takeover, the animosity was real. It’s fair to say the Glazers are not welcome anywhere outside the front offices of the Red Devils.

A group of local investors, calling themselves the Red Knights, emerged in 2010 in the wake of protests over another round of debt restructuring. A non-violent protest was organized by the club’s supporters groups, following the “Love United Hate Glazer” campaign that existed since 2005.

The campaign encouraged match-going fans to wear green and gold, the colors of Manchester United’s precursor club, Newton Heath. In January, reports emerged that the Manchester United Supporters’ Trust had held meetings with a group of wealthy fans with a view to buying out the Glazers’ controlling interest. The group met with Keith Harris, a Manchester United fan and the chairman of investment bank Seymour Pierce, to broker a takeover.

Given the amount of debt the Glazers had amassed, analysts estimate it would cost the Red Knights nearly $3 billion to purchase the club. In June, 2010, the Red Knights put their takeover bid on hold, citing “inflated valuation aspirations.”

But as Ferguson is soon to retire, expect the fight for the club to intensify as longtime supporters fear the debt ultimately will ruin one of the world’s greatest sports franchises.