Issuing a yellow card to Manchester United public offering
Manchester United (MANU) went public last Friday giving its loyal fans a chance to own a piece of the storied franchise. The club has a long and rich history with millions of fanatical supporters and a great record on the pitch but I was curious to find out if MANU might also be a good investment. What I found is that it might deserve a yellow card.
Manchester United, the English professional football club, was originally founded in 1878 as the Newton Heath LYR Football Club. In 2005, the Glazer family, owners of the NFL’s Tampa Bay Buccaneers, purchased the club using a huge amount of debt to fund the transaction. On Friday the company sold 16.67 million shares at $14 per share on the New York Stock Exchange under the ticker MANU for proceeds of roughly $233.3 million. This amount represents about ten percent of the company and the proceeds are slated primarily to reduce the hefty debt burden of $663 million still outstanding from the Glazers’ purchase.
Forbes recently ranked MANU the world’s most valuable sports franchise pegging the value at $2.23 billion. The firm benefits from a huge fan base which contributes to its large sponsorship contracts. According to Kantar Market Research, in 2011 there were 325 million supporters in Asia Pacific, 173 million Middle East & Africa, 90 million in Europe, and 71 million in the Americas. This large global fan base generates keen interest from sponsors looking to associate their products with the club. Insurance giant Aon pays $31 million a year to put its logo on the team’s jersey, DHL Express inked a deal to pay $62 million over four years to display its name on the team’s practice jersey and Nike manages its merchandise sales for $39 million.
MANU has a lot going for it so why take caution as an investor? There are obviously many issues to consider but I’ll briefly touch on five aspects.
1. Sports franchise investing is a fundamentally tricky and risky business. You don’t make a lot of money when you lose. Losing teams rarely garner large sponsorship contracts and a huge loyal season ticket holding base. In fact a large negative is the pro-cyclicality that the business exhibits when you are losing you probably need more money to buy star players to win but your revenues are likely falling just when you need the cash. The opposite is true for when you are winning. Winning makes you more popular which can lead to more money and a greater ability to pay up for even better talent. Competition is also fierce. Talent can be disproportionately bought and teams can suddenly find themselves under pressure. A case in point are the recent moves by Roman Abramovich, a Russian oil tycoon who bought Chelsea Football Club and poured millions into acquiring players that led to two Premier League titles. Or the Qatar Investment Authority which bought Paris St Germain, loaded it with talent and subsequently finished second in the top French league last season.
2. MANU is taking advantage of the US Jumpstart Our Business Startups (JOBS) Act which exempts the company from attesting to its internal financial controls for up to five years. MANU will also not be required to file reported financials under generally accepted accounting (GAAP) principals. Investors REALLY need to trust management here as there is little regulatory overview.
3. The deal does not look extremely shareholder friendly. First, the club is selling about ten percent of the club in the form of Class A shares which entitle the holder to only one vote versus the Class B shares which are entitled to 10 votes. Essentially the Glazer family still retains about 98 percent of the voting power. Also the Form F-1 registration statement clearly states that MANU does “not currently intend to pay dividends on our Class A ordinary shares”, yet in April the Glazers paid themselves a $15 million dividend.
4. When MANU approached their Asian fan base, they balked. The club earlier attempted to go public in Hong Kong and Singapore but major opposition to the dual share class structure and lack of demand caused the process to fail.
5. Valuation matters. It appears MANU will be trading at 113 times fiscal 2011 profits. Not exactly cheap for a company that had revenue growth of only about nine percent over the past nine months.
This list of concerns is by no means exhaustive so many other factors need to be considered. MANU may be a fantastic football club but that doesn’t necessarily mean it’s a fantastic investment. If you are a fan it may be better to buy a jersey than the stock.
On Friday MANU closed at $14. I’m pulling out my whistle and issuing a a yellow card.
Disclaimer: This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and nonproprietary sources deemed by Anchor Investment Management Ltd. to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. Readers should consult their financial advisors prior to any investment decision.
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