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08/09/2012
Manchester United has revealed that its new shirt sponsorship deal, signed last week with Chevrolet, is worth a record breaking US$559m (£357m) over its seven-year period. The club confirmed financial details in a regulatory filing ahead of the launch of its initial public offering on the New York Stock Exchange later in August.

The main deal begins in the 2014/15 season, but the club says a secondary deal, worth $18.6m in the 2012/13 and 2013/14 seasons, will start before the primary deal worth $70m annually in 2014/15. The payments will then increase by 2.1% every season through until 2020/21 bringing the total in 2021 to $81m per year. The current record deal for a soccer shirt sponsorship is between Barcelona and the Qatar Foundation, which is worth $40m per year and runs until 2016. Current Man Utd sponsor is insurance firm Aon, which pays $31m per year. So why has the new deal broken previous records by such a high margin?

The first point to look at is the starting date. By the time the sponsorship starts in earnest in 2014, it will have been four years since the Aon deal was signed, so it is not an overnight doubling. Rights values for major properties are now growing at a rate well ahead of inflation. Recent deals between Manchester City and Etihad and Liverpool and Standard Chartered, both above the $30m mark, raised eyebrows. Barcelona’s first commercial shirt deal set a new benchmark and it was almost inevitable that Manchester United, the world’s most commercial club, would trump that.

The club has boosted its sponsorship income dramatically in recent years, having signed a series of local deals in Asia, Africa and the Middle East with telecoms companies and it is this global presence that Chevrolet is paying to tap into. The American car giant is certainly keen to boost its international image through sponsorship and has deals with e.g. the Spanish football federation; RFEF, Liverpool and China’s most popular athlete; Liu Xiang.

That said, the obvious question remains: why did the car giant have to pay so much? If $40m is the market rate at present, why $70m in two years time – it is a huge hike?

There are four possible answers analysed here. Already a few rumours are starting about a possible naming rights element to the deal. Personally I doubt this is the case. Anyone trying to take naming rights to Old Trafford (as with other established grounds such as Anfield) would be inviting the wrath of the relatively small - but influential - group of long-standing English fans. It is therefore unlikely that Chevrolet would have a lot to gain from naming rights, so long as their contract states that no other brand will be offered the opportunity.

The second issue is whether or not there was a bidding war. Despite the obvious value of the Manchester Utd brand, this is unlikely to be a major factor. Industry rumours do suggest that another potential sponsor was bidding, but there has to be a question as to whether Manchester United is currently in decline, which would counter any upward movement from competitive bids. Last season was the first in years without a trophy and the squad is looking weaker than it has for a long time. Its competitive edge appears to be down to Sir Alex Ferguson getting the most from limited resources, and he is surely set to retire before the new deal has run its course. Chelsea and Manchester City have invested heavily in their squads and the Spanish giants of Barca and Real Madrid are very strong in Europe.

The redeeming factor for Manchester Utd could be UEFA’s Financial Fair Play rule, which will curb spending among benefactor backed clubs and potentially reduce wage inflation and transfer fees. Manchester Utd will be well placed to take advantage due to its high earnings, so long as it can reduce the interest payments on its huge debt.

The third point is whether the quoted figures will be the actual amounts paid. Reported values of sponsorship deals are often based on the rights holder meeting all of its incentive targets i.e. in this case winning the Champions League, Premiership and FA Cup every year and doing nothing to draw adverse publicity on the sponsor. It is therefore not unusual for deals to be reported up to 25% above their base value. It is very rare that either party in a sponsorship contract discloses whether the quoted figure includes incentive bonuses.

Finally, could it be that Chevrolet has simply paid over the odds? This does happen in sponsorship where brands actually want it to be known that they have paid top dollar – it demonstrates a corporate bravado and sends out a message to competitors about their ambitions.

However, Chevrolet’s parent, General Motors, fired Joel Ewanick, its global marketing chief just as the deal broke. The timing was curious. U.S analysts, supposedly with inside information, claim the move had nothing to do with the deal and was related to Ewanick’s inability to grow market share. But GM itself boasts of its best ever global sales performance for Chevrolet in 2011 and strong growth for the group as a whole. From a PR point of view, firing your head of marketing just as you announce one of the most prestigious sponsorship deals in history is an ‘unusual’ combination.

When the dust has settled, the really interesting question will be to see what happens to Chelsea and Arsenal’s deals in the next couple of years. They are currently both below $20 million and the pressure will be on them now to exceed $35 million per season. A tall order with the global economy in its current state.

Manchester United sponsorship; related content:

Report: European Premier League Soccer Sponsorship

Comment: Man Utd sponsorship strategy bucks the trend

Comment: Why the Glazers won't sell

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