Why?
- Regulator shopping
- Major corporate governance problems
- Irrational Competition
-
Very poor track record of publicly traded soccer
teams
-
“Peak” Man Utd: success, attendance, media content
(+ the General Motors CMO firing over the Chevrolet/Man Utd deal)
-
Substantial “Key Person” risk
-
Credit risk
-
Very high valuation relative to other prominent
soccer teams
-
Buried negative news for full FYE 6/2012 in the
filing
-
Recent star transfer highlights capex danger;
material but not filed with the SEC
-
Dearth of natural buyers
Apparent “Regulator
Shopping”
If you found it unusual that one of the most storied teams
in the history of soccer would do its IPO in the US, you’re not alone. MANU was
rumored to be considering an IPO in Asia (as have a fair number of European
luxury brands), and, yet, the deal was done in New York. This is akin to the NY
Yankees IPOing in Moscow. The devil (pun intended) is in the details: Manchester United, founded in 1878, was
able to qualify as an “emerging growth company” under the new JOBS Act that
loosened the compliance requirements for smaller public companies. This is
a clear case of regulator shopping and a major red flag, especially considering
that the company is very well established and was publicly traded in the UK
before the Glazer takeover. It is difficult to see an upside for the individual
investor.
Major Corporate
Governance Problems
There are a few points here. One is dual-class shares. While
the Glazers want you to have all of the downside economic risk, they are
keeping the high-vote Class B shares all to themselves. An outside investor
cannot win from a dual-class structure, and there are plenty of abuse examples
(NY Times, Dillards, Dover Motorsports, etc.) There is a large number of
related party transactions, including, but not limited to Manchester United
loans to the Glazers, consulting fees to the Glazers and the Glazers also being
creditors to the club (they hold a certain percentage of the debt, obviously a
conflict). Finally, only half of the IPO money went to the club for debt
reduction. The other half was pocketed by the Glazers: if MANU has so much
upside, why are they not keeping the shares?
The Competition is
Irrational
Let’s spell it out: sports teams are billionaire hobby toys.
They are not rationally run businesses: the owners will fund large losses due
to expensive player contracts to win. Acquiring
marquee players is a hamster wheel, year after year after year. As a
shareholder in MANU, you are signing up to compete with the spending powers of
Arab oil sheiks (i.e. Manchester City, current champions) or Russian oligarchs
(i.e. Chelsea, a top 3 team over the last decade). Eventually, the enthusiasm runs out but we are not there yet
in the major European and US leagues (we’re seeing it on the fringes, like the
bankruptcies of the Glasgow Rangers in the Scottish Premiership or the Phoenix
Coyotes in the NHL or the LA Dodgers in the MLB). Good businesses spend little
on capital expenditures on an ongoing basis, bad businesses spend a lot every
year. Unfortunately, players are not warrantied like a machine is. Here’s
Manchester United’s spend:
Publicly-traded
Soccer Teams Record
The track record of publicly traded soccer teams is an unmitigated
disaster. Here is something from Saxobank analyst Sverrir Sverrirsson.
Most of the teams have had negative IPO-to-now/IPO-to-end
return. From the positive teams, two are in the English Premiership, so they
rode the big media money wave from the 1990s/2000s when the EPL was getting
established. I don’t know what to
say about the Turkish teams (assuming the returns are in constant currency, not
nominal Turkish lira returns). The performance of these IPOs is
incontrovertible evidence (well, at least for me) that soccer team ownership is a hobby, not a business.
“Peak” Manchester
United: Peak Performance, Peak Media Monetization, Peak Sponsorships, Peak
Attendance
MANU’s revenues are roughly split in 1/3rd’s: broadcast,
commercial/sponsorships/licensing and
attendance. All are close to peak, in my view.
Simply put, MANU is a
very successful but already a very heavily monetized brand. Unlike their
cross-town rivals Manchester City who just won their first title in 40-50 years
or (expected) up-and-comer Paris Saint Germain, MANU is a true dynasty. Here is
a look at their performance: ask yourself, can it get any better?
Since MANU does not control the TV contracts (those are
handled by the English Premier League for the EPL games and UEFA for the UEFA Championship
League; in total, MANU is available for viewing in 210 countries), MANU can
control only the “highlights and behind-the-stages” mobile product, ALREADY
available in 42 countries. The mobile product has grown nicely, now accounting
for GBP 16mm after doubling for two years in a row. The EPL contract was re-signed in June 2012 (with MANU
benefiting) and UEFA is sold country by country, so the danger of a blockbuster
contract signing is low).
“Peak sponsorship” is the other problem. MANU has been
aggressively growing the roster of sponsors (i.e. Smirnoff is their Asian
“responsible drinking partner”, whatever that is; DHL is a “training kit
sponsor”; etc.). The biggest chunk
is the most visible sponsorship, the jersey. MANU’s revenue growth there is
impressive:
But there is a MAJOR
problem that I have not seen anyone in the mass media mention yet. Chevrolet
will be their next jersey sponsor. However, GM’s head of marketing just got
fired on the spot (!) over the MANU sponsorship deal, as he apparently tried to
hide the true cost of the contract across a few accounts (until a whistleblower
reported it). GM is one of the largest, most sophisticated ad buyers in the
world, and if they balk at the MANU sponsorship costs, you can bet they are not
the only ones.
MANU’s licensed products are already available in 130
countries, and are obviously very dependent on the team’s ongoing “star power”.
The final revenue stream is gameday attendance and related.
The problem there is that attendance for their home games is has been at 99%
capacity for the last 15 years. Future ticket increases will only worsen the
already tense relationship between the unwelcome ownership group and the team
fans. The stadium was expanded in 2006, and any further expansion will be
coming from the shareholders’ pockets. The question is not only capacity: MANU
already plays close to the maximum number of games at home. The EPL is one of
the larger leagues in soccer, and the team usually advances pretty far in all
other tournaments (UEFA Champions League, the Carling Cup, etc.).
Key Person Risk
MANU has exceptional
key person risk. Right now, it is probably concentrated in their star
strikers (no one pays to see a great defensive tackle) and their longtime
coach, Sir Alex Ferguson. Injuries and the coach’s eventual departures will
mean either worse results or big spending in the market to attract replacement
talent.
Credit Risk
MANU carries GBP 360 mm in debt after the IPO proceeds.
While not a crazy level of leverage, debt adds risk. The team paid a call
premium to retire a portion of it with the IPO proceeds.
Guidance for FYE
6/30/2012 Is Poor
Under “Recent Developments” in their filing, MANU discuss a
3-5% revenue drop to GBP 315-320 mm due to fewer home games and lower UEFA TV
revenue. EBITDA will be down 16-18% to under GBP 100 mm. Earnings would have
been mildly negative, save for a GBP 28 mm tax credit.
So, EV/Revenues is at 5.2x and EV/EBITDA is at 16x.
Relative Valuation
MANU’s valuation is very high compared to the two closest
publicly traded comparables, Borussia Dortmund in Germany and Juventus in Italy
(both major championship brands in major media markets).
BVB.GR EV/Sales is 1.2x and EV/EBITDA is 4.1x, JUVE.IM has
negative EBITDA and earnings; EV/Sales is 1.8x. (Bloomberg data)
So, MANU is at 3-4x the relevant metrics of the comparables.
Should it trade at a premium?
Sure. But should it be so high? Probably not. It is easy to see 50% downside
from here, just as it easy to see 50% upside on “vapor”, why not?
Recent Transfer of
Robin van Persie
MANU spent GBP 30 mm in September 2008 to sign Tottenham
striker Berbatov, who went on to become the top scorer in the league for
2010/11. Berbatov was benched for most of the 2011/12 season, and MANU lost the
title to Manchester City on goal difference. MANU just paid GBP 22 mm to
Arsenal for the 2011/12 league top scorer, Robin Van Persie. RVP is reportedly
personally getting GBP 200k per week (GBP 10.4 mm per year). These are material
expenses and material future liabilities that MANU has not (yet) filed with the
SEC. You’d think that spending 20% of your EBITDA on a player and then
promising him 10% for the year would be material. This situation illustrates a few of the problems highlighted here:
constant capex spending on “stars”, high “key person” risks, lack of proper
disclosure of material expenses and off-balance sheet liabilities.
Dearth of Natural
Buyers
Who would own this stock? It is not clear to me who would be a natural, long-term, strong-hand
buyer of the stock at these levels. One would have expected that a strong
retail fan base would be good (as is the case with the Green Bay Packers
“stock” or some of the Spanish teams) but the team IPOed in the US. While currently sizable enough, the
non-US domicile and operations of the company, along with its problematic
governance and looser financial control requirements, might keep some investors
out. The drop in the IPO price to $14 from the initial range of $16-$20, along
with Jefferies being lead left underwriter, makes me think that no one came to
the party. The high borrow cost and lack of shares to short are also indicative
of market pessimism.
Risks
- Irrational valuations can stay irrational for long periods
of time
- Low float and high short interest make the stock prone to
short squeezes
- One big name, well respected holder thus far (Soros)
- The new Premiership TV contract not properly priced in,
leading to a positive “surprise” forward projections
- UEFA Champions League advance (vs. the highly unusual
group stage elimination last season) means more home games, thus “lapping easy
comps”
- Stock trading on how the team is doing (and they usually
do well)
- Stock purchases in the open market by an entity as a
prelude to an outright exit by the Glazers
Disclosure: positioned to profit from a decline in the stock; the position can change at any time; information sourced primarily from the Securities and Exchange Commission and other sources believed to be accurate; however the information here is presented without warranty for discussion purposes only.
Disclosure: positioned to profit from a decline in the stock; the position can change at any time; information sourced primarily from the Securities and Exchange Commission and other sources believed to be accurate; however the information here is presented without warranty for discussion purposes only.



