12 - 18 October 2000

Investors Corner

The market
Leading shares in London finished a volatile Friday session modestly higher, putting in a late rally thanks mainly to strength in BT despite Wall Street’s reversal of opening gains, with New York under pressure once more from downgrades and earnings warnings ahead of the Columbus Day holiday weekend. At the close, the FTSE 100 index was 9.2 points higher at 6,391.2, below an earlier peak at 6,412.5, but well above its afternoon low of 6,342.2. Volume was solid, with 1.554 billion shares changing hands in 102,863 transactions boosted by strong trading in BT and Vodafone.
UK blue chips started the session cautiously lower this morning, with early trading nervous after further falls overnight on Wall Street in the wake of last Wednesday’s after hours profits warning from Dell – with “new economy” issues bearing the brunt of the decline. Early interest was also limited ahead of the key US non-farm payroll data for September with the normally volatile pointers providing further indication on Federal Reserve rate policy, although US rates were left on hold after the FOMC meeting. Leading shares remained dull throughout the morning session, with little corporate news to provide any interest, and the latest UK data provided no relief.
UK industrial production rose a seasonally adjusted 0.6 per cent month-on-month in August, which left it 1.6 per cent higher on the year. Analysts’ forecasts was for August industrial output to have risen 0.2 per cent on the month for a 0.8 per cent year-on-year rise. Manufacturing output in August was up 0.8 per cent on the month, giving a year-on-year rise of 1.1 per cent.
Analysts’ forecast was for August manufacturing output to have risen 0.3 per cent on the month, and 0.5 per cent year-on-year gain. However, despite this news, UK blue chips managed to rally towards midday, reversing earlier falls, amid hopes of a firm start on Wall Street.
The US unemployment rate dropped by 3.9 per cent – the lowest since April – against 4.1 per cent for the previous month. Hourly earnings were 0.2 per cent higher from August and up 3.6 per cent year-on-year, against expectations of a 0.3 per cent rise. Market watchers warmed to news of the lower-than-expected rise in average hourly earnings, saying it shows that there is still some growth in the economy, but little inflationary pressure.
New York shares made positive early progress in reaction to the US data, however the positive progress was short lived with first the Nasdaq index and then the DJIA falling back in reaction to fresh earnings worries across the Atlantic, and reports of a downgrade in rating for AT&T by Schroder Salomon. By London’s close on Wall Street, the DJIA ended 79.54 points weaker at 10,645.58, with the Nasdaq index off 71.290 points at 3,400.81.
However, although the FTSE 100 index dropped back initially in reaction to the New York downturn some bargain hunting and – notably – a big turn around in BT provided the London market with a late rally. BT shares stormed up the list of blue chip gainers after Robert Brace, the group’s finance director, announced his immediate departure from the group and resignation from the board after 11 years.
BT shares jumped 53 pence higher to 740 pence with Brace’s move seen as a possible prelude to a further shake up of the board, and the possible departure of chairman Sir Iain Vallance. Phillip Hampton, currently group finance director of BG Group is to take over from Brace at BT – BG shares managed to hold on to an 8-3/4 pence gain at 444 ahead of the firm’s upcoming demerger.
Elsewhere, Logica shrugged off the Nasdaq’s fresh down turn, remaining in demand on the FTSE 100 index with a 115 pence gain at 2,290 as Lehman Brothers highlighted the stock’s attractions after several days in the doldrums. Misys also renewed its recent gains, adding 23 pence at 715 boosted by an upgrade in rating by Morgan Stanley to “outperform”, and news of the stock’s promotion to Deutsche Bank’s “European Focus List”.
Marconi was also well-bid, up 10 at 930 as the market welcomed the group’s plans for a Nasdaq listing to start around the week of 16 October. The firm said first half underlying trading is in line with expectations, while the full year operating outlook is in line with consensus market forecasts. UBS Warburg was a fan, rating the stock a “buy” up to 1,250 pence.

Manchester United
Manchester United, the football club, reported a 25 per cent decline in pre-tax profits to £16.7 million for the year to 31 July. Gate receipts amounted to £36.6 million, a decrease of £5.3 million on last year’s figure of £41.9 million mainly reflecting the fact that 26 home games were played at Old Trafford this year compared with 31 games last year. Merchandising and other turnover increased by nine per cent to £23.6m.
A major stock clearance programme was undertaken in the second half of the year following the announcement in February 2000 of the change in shirt sponsor with effect from June 2000. These sales were made at a significantly lower margin than normal and have therefore affected the overall result for the Merchandising division.
Manchester United’s new home playing kit launched on 1 August 2000 has been very well received and should contribute to higher sales volumes in the current financial year. MUTV, the joint venture television channel with BSkyB and Granada, continued to incur losses in the year although at a lower level than last year with United’s share amounting to £1.0 million compared to £1.7 million last year.
Following the recently renegotiated FA Premier League television contracts, effective season 2001/02, Manchester United is hopeful that the availability of first team action around 48 hours after the match has been played from the beginning of season 2001/02 should result in a significant increase in subscribers. The Quality Hotel adjacent to the Old Trafford stadium in which Manchester United has a 25 per cent stake continues to trade profitably. The club has recently taken a 31.4 per cent stake in a 120 bedroom hotel to be built adjacent to the Trafford Centre shopping complex, just a couple of miles from Old Trafford, which is due to open in late 2001.
In addition, the club is preparing to submit plans to Trafford Council to develop an all weather floodlit pitch and an indoor hall with associated facilities at Carrington which will enable its Academy to be based alongside the professionals. The capital expenditure is currently estimated to amount to £8.6 million. Youth development is the cornerstone of the future at Manchester United and this expenditure will complete all of its infrastructure needs.
The group’s consolidated balance sheet remains very strong with net assets increasing to £114.9 million at 31 July 2000 compared to £107.9 million last year. The increase of £7 million reflects the retained profit for the year. Expenditure on tangible fixed assets at £31.3 million has been particularly significant this year as the club completed the new player training complex at Carrington and substantially completed the stadium expansion programme at Old Trafford.
Cash generation across the group remained strong with £35.8 million being generated from operating activities. Investment in tangible fixed assets is expected to decrease in the new financial year following the completion of the stadium expansion project and the cash position should grow. Net cash was £10.6 million compared to £37.6 million at 31 July 1999, however, the strong cash generative characteristics of the business should result in the cash position beginning to grow in the medium term.
The amortisation charge for the year increased by £2.9 million to £13.1 million reflecting the acquisitions of Taibi, Fortune and Silvestre at the beginning of the season (no acquisition costs were incurred on Bosnich as he was signed as an out of contract player under the Bosman ruling). Player disposals generated a net profit of £1.6 million comprising £3.6 million profit on the sale of home grown players and a loss of £2 million on the sale of acquired players (mainly Taibi).
Net transfer expenditure during the year, including the acquisition of Fabien Barthez just prior to the year end, was £13.6 million compared with £11.1 million last year and therefore continues to represent a significant cost to the business.
Following the decision of the Trustees of The Football League Limited Pension and Life Assurance Scheme (“the Scheme”) to suspend, as of 31 August 1999, the defined benefit element of the Scheme, a review of the funding position has been carried out by an independent actuary appointed by the Trustees.
The final deficit at the date of suspension was quantified at £12.5 million which, under the Pensions Act 1995, participating employers will be required to make good. The club has recently been advised that its share of this deficit is currently estimated to be £1.3 million.
As it is probable that the bulk of this deficit will relate to employees who are no longer in pensionable service with Manchester United, a provision has been made for the full amount in this year’s accounts, although, in accordance with the Pensions Act 1995, payments to make good the deficit will be made over a period of seven years.
However, Manchester United’s board has not yet approved the liability as a number of important issues, particularly with regard to the basis of apportionment, remain to be resolved which may reduce the final quantification of the club’s share of the deficit.
The board sees many exciting and challenging opportunities for this business in the future. Technology is changing the business environment in which the club operates and it believes there are a number of opportunities particularly in the area of new media which it is ready to exploit.
The new three year broadcasting contracts worth £1.6 billion recently announced by the FA Premier League will have a positive impact on United’s television income but the benefit to its future earnings will be influenced by how successful it is in controlling player wage costs and in negotiating reasonable contracts for its top players.
The outcome of the current challenge by the European Commission on the payment of transfer fees within football for in-contract players could have a significant effect on the shape of football finances but until the outcome of current negotiations with the European regulatory authorities is clear the board is unable to form a judgement on the impact on Manchester United.
Manchester United’s board has promised that the strategies that have helped Manchester United to achieve the success it has enjoyed over the past decade will remain in place to ensure that it continues to deliver superior returns to its shareholders from being a major force in English and European football.
Please note that the value of investments can fall as well as rise.