Manchester United PLC Short: Too Many Red Devils to Ignore (NYSE: MANU) $MANU

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 1/3^rd’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. 

No, You Can't...

No, you can't have a 1930 pension system with 2030 demographics. It just does not work, and, if there are no explicit cuts, there will be a soft default, such as no indexing for 15 years. There is a substantial path dependency in both "funded" and unfunded promises, and the clock has been ticking for decades.

No, you can't have real healthcare reform without looking at the real culprit: costs. Healthcare delivery in the US simply costs too much relative to everything: incomes, the size of the economy, other countries, outcomes, you name it. There are three very simple to implement moves that will have an immediate effect on costs. First, mandatory copays on absolutely everything. The consumer must have skin in the game, and providers will have a hard time running up the tab on private insurance or the taxpayer (don't think that abuse is the exception). Two, hard limit on malpractice liability awards, followed by tort reform: sideline the parasites. Finally, minimum mandatory sentences for medical fraud (triple for participating doctors).

No, you can't be a supporter of gay marriage without being a supporter of other forms of voluntary association between consenting adults. If the state should not regulate marriage, should the state regulate voluntary arrangements over work? To translate, do you support minimum wage? How about an individual's freedom to voluntarily provide services to other individuals, such as bookmaking or prostitution? Take it a step further, how about freedom of dis-association? Can a private group disassociate itself from, say, white people? Women?

No, you can't have government "insurance". There is no such thing. Real insurance is based on sound actuarial principles, discrimination to limit risk and pricing underwriting profit. Government "insurance" does neither of these. Old-age, Survivors and Disability Insurance (better known as Social Security) is a wreck. As are Medicare "insurance" and Medicaid "insurance": the payroll tax for these is nowhere near where is should be to cover current and planned expenses. It is simply a transfer payment. There is also the National Flood "Insurance" Program, that apparently ran a $18 bn deficit in 2010. Don't forget that, in the name of increasing homeownership, Fannie and Freddie guaranteed (that is, "insured" for a fee) mortgages in the trillions, and became the largest cost to taxpayers in the financial crisis. Finally, Obamacare is an affront to "insurance" with its removal of copays, limits and coverage restrictions ("yes, psycho, you can rack up $500,000 in IVF treatments without paying a dime on everyone else's back").

No, you can't have a functioning society without inequalities. If you remove the incentive of inequality, then no one will bother to excel. Should Bolt be given a dumbbell to run around with because he's too fast? Should all teams go to the playoffs? Should all students get A's? The reality is that life offers asymmetric payouts that are somewhat reflective of effort, smarts, luck, etc. If the system becomes confiscatory to enforce someone's notion of "equality", people will not bother to achieve. Look at the wasted lives in Eastern Europe between 1945 and 1990: without the possibility to accumulate surplus from your labor, it just does not pay to try harder.

No, you can't be "for" or "against" immigration. Bundling Sergey Brin, George Soros, Andy Grove (and many others) with LatAm peasants and gang members is a major, major mistake, and the US is paying for it by failing to recognize that educated people who play by the rules (and are, hence, more desirable) will leave the country if their visa (student or otherwise) expires. People with nothing to lose will come illegally and stay. Which group do you want to encourage to stay? And which group would an "amnesty" program actually give you? The numbers are not trivial, and, if persistent unemployment is a problem, the answers are pretty clear (and surely non-PC).

In Defense of Eduardo Saverin

On this blog and on twitter, I think I have a history of taking less-popular viewpoints (including taking less-than-fawning views on Warren Buffett recently and on junior gold miners in 2010- even while long at the time; these articles happen to be the number 1 and 2 most-read posts), so I will take the Eduardo Saverin controversy for a spin as well. If you've been living under a rock, Mr. Saverin, the Brazilian-born Facebook co-founder, renounced his US citizenship recently, provoking much wrath all over the media and with certain Senators.

Here is where my perspective comes from: I am an Eastern European immigrant in the US (not a citizen). I caught the tail end of the Communist dictatorship so I do appreciate the importance of personal freedom in its many forms (association, economic activity, speech, property ownership, taxation, etc.) My great-grand parents were war refugees who fled their ancestral village literally with nothing but the shirts on their backs just because they were of the wrong nationality in the wrong country. The grandparents on the other side were internal labor migrants who spent years building a small home just to see it confiscated by the city government to make way for the gray concrete apartment blocks that E Eur is known for. My parents' entire lives were basically stolen by communism and its aftermath. So I do tend notice the creeping erosion of freedom in the US (from the Coke/Pepsi system to the TSA to lightbulb bans to self-censorship to bake sale bans to indefinite detention to warrantless searches to hairbraider licensing requirements to closures of kids lemonade stands to extrajudicial killing of citizens). Back to Saverin and why he is not an ungrateful uber-rich stateless parasite, with the caveat that nothing discussed here is advice as I am not an expert.

(1) It would be fair to say that we, as a society, abhor critical attitudes towards things people did not choose: race, height, etc. Based on various articles, Mr. Saverin was born in Brazil in 1983 and was naturalized in 1998. He was not older than 15 at the time- not of legal age- so his parents probably had him do it. The story would have a very different feel if Mr. Saverin got a passport at 35 and wanted to give it up at 40 after getting rich. The important point is that Mr. Saverin, just like most US citizens, really did not choose to be one.

(2) Along those lines, US born citizens who choose to move abroad later in life and renounce their citizenship by choice, are largely treated like tax cheats and have to pay unrealized capital gains even on current holdings, and possibly more into the future (after the renouncement is effective). This is the dreaded "exit tax", not unlike the property confiscations of people trying to emigrate (or flee) from oppressive regimes.

(3) The mainstream media is implying strongly that the purpose of Mr. Saverin's giving up his citizenship is tax avoidance. This may or may not be true, but this is not any different really than Turbotax running various tax deduction scenarios on your own return (itemized vs. standard being ubiquitous). As a matter of fact, there is a Supreme Court decision that expressly permits legal tax minimization.

(4) From a practical standpoint, it is increasingly difficult to lead a normal life as a US expat. Due to onerous US regulations, it is not unusual for US citizens to be refused bank or credit card accounts as foreign institutions do not find it practical to meet US reporting requirements. Having a US passport also makes you unwelcome- even a target- in a good number of countries by now. Being "neutral" is much safer.

(5) The US is the only OECD country that taxes citizens (including corporations) on worldwide income. As Mr. Saverin's residence and affairs are by and large non-US, it does make perfect sense for him not to be a US citizen.

(6) If you disagree with Mr. Saverin's perfectly legal, and in my view, logical, step, you can do one very simple thing: cancel your FB profile. Just like your having a linkedin profile makes money for Reid Hoffman and having an iPhone makes money for Steve Jobs's estate, everything you upload and read on FB makes money for Saverin.

(7) Mr. Saverin's renouncement should have been an introspective moment for the US as a nation of liberties and the US tax code. Instead, it was simply a part of Facebook's IPO freakshow and the opulent douchebaggery narrative that accompanies the company. Think about it, if smart, highly successful people do not want to be a part of your country (putting the US in with Russia, China or the RSA), should you look in the mirror first? Could Saverin be the canary in the coal mine?


Disclosure: I have no position in FB or in US citizenship futures and I do not know Mr. Saverin.

PS: the freedom to leave one's country at one's own volition without impediments is so basic that even the UN gets it. Here a bit from Daily Reckoning:


Should the French impose an exit tax on these “ex-patriots”? Should it then bar them from visiting France?
Of course not.
In England in 1215, the right to travel was enshrined in Article 42 of the Magna Carta:

It shall be lawful to any person, for the future, to go out of our kingdom, and to return, safely and securely, by land or by water, saving his allegiance to us, unless it be in time of war, for some short space, for the common good of the kingdom: excepting prisoners and outlaws, according to the laws of the land, and of the people of the nation at war against us, and Merchants who shall be treated as it is said above.

Here’s the United Nations Universal Declaration of Human Rights. Article 13:

(1) Everyone has the right to freedom of movement and residence within the borders of each State.
(2) Everyone has the right to leave any country, including his own, and to return to his country.

Article 12 of the International Covenant on Civil and Political Rights incorporates this right into treaty law:

(1) Everyone lawfully within the territory of a State shall, within that territory, have the right to liberty of movement and freedom to choose his residence.
(2) Everyone shall be free to leave any country, including his own.
(3) The above-mentioned rights shall not be subject to any restrictions except those provided by law, are necessary to protect national security, public order (ordre public), public health or morals or the rights and freedoms of others, and are consistent with the other rights recognized in the present Covenant.

People should be able to move where they want, no? They should be able to look for lower tax places to live, shouldn’t they? After all, we’re Americans, aren’t we? Aren’t we all descendants of people who tried to improve their lives by moving to a new place?
Apparently, a lot of Americans don’t think so. Facebook is going public. And one of Facebook’s founders has moved to Singapore. He will save, by one estimate, $67 million in taxes by giving up his US citizenship. He says that’s not the reason he gave it up. But you can believe what you want.
And now the politicos are up in arms. Mr. Saverin has helped to give them an asset worth about $100 billion. Are they grateful? Do they bend down and kiss his derriere?
No! They want to tax him even more heavily…and prevent him from ever setting foot in the US again.
Yes, dear reader, there is no thought so dumb…so short-sighted…so low…that it won’t become the law of the land. Bloomberg reports:

Chuck Schumer, D-N.Y., has a status update for Facebook co-founder Eduardo Saverin: Stop attempting to dodge your taxes by renouncing your US citizenship or never come to back to the US again.

Why Facebook is like a newspaper circa 1999

With all the frenzy around Facebook's upcoming IPO, here are a few thoughts. I have no idea where it will price and what the stock will do on the first day. What I do know is that there is a parallel between between Facebook right now and the newspaper industry in 1999: it is trying to be everything to everybody in an emergent age of choices.

Facebook has nearly "everyone" in it, and, as a result, it is useless. There are numerous niche substitutes that do not hunger to play some omnipotent figure like the Hooded One does, and, on top, it is not difficult or expensive to build your own social network around any affiliation, with all FB features, and then some.

Here are my non-Facebook social networks where I spend about 1,000x the time I do on FB:
- Twitter: careful selection of people to follow has led to an overwhelmingly positive experience.
- LinkedIn: they will put most job search sites, temp agencies, job application software companies and headhunters out of business
- Closed alumni networks: similar use to LinkedIn
- SumZero and Capitalist Collective: stock discussions, not dissimilar to my experience on Twitter, without the draconian limit on characters
- Google Reader: until recently, it was a good way to pool "eyeballs" for news articles worth sharing
- Pinterest: a running collection of feeds that I find visually appealing (architecture, design, etc.)

And here are a few others that I don't use but I can see them chipping away at FB:
- CollegeOnly: of course, "the kids" figured out that parents use FB to keep tabs on them...
- NextDoor: neighborhood-based social network that is actually locally relevant to you
- Tumblr: the ease of sharing pics/articles creates communities of interest (astounding amounts of 18+ materials there)
- Numerous dating sites by interest, ethnicity, etc.
- Multi-player, Zynga-standalone and app-based gaming
- Good old-fashioned forums
- 4Chan if that's still around
- I am sure I am missing a few

Finally, you can be your own Zuck with SocialEngine, starting at $299 or something. There are NO barriers to entry, and they have something like 650 additional developer plugins (like group buying functions) that FB does not have.

I expect to see FB becoming even more obnoxious over time as they slowly slip into irrelevance. Good luck to any pre-, at- and post-IPO buyers.

The Housing Bubble vs. The Higher Ed Bubble

There are many parallels between the US housing bubble of the 2000s and the US higher education bubble. Let's look at them.

(1) False premise in housing: higher home ownership is a good thing. False premise in education: more people going to college is a good thing. It is not. Too many people go to college. So many, in fact, that there are 17 million college graduates in jobs that do not require college degrees, as of 2010.

(2) False premise in housing: a home is an investment; home values never go down nationally. False premise in education: a degree is an investment that will make you more valuable with higher earnings over a lifetime and lower unemployment rates. This is cannot be statistically proven as there is NO control group (people admitted but not enrolled, with the same test scores as college graduates).

(3) Special class of credit involved in housing: mortgages are typically non-recourse, government-guaranteed (for the ultimate holder of FNM/FRE paper), non-market based product (30-year, fixed-rate is not a "free market" product). Special class of credit involved in education: student loans are also non-free market products, many given directly by the Dept of Education, covered by the taxpayer, with income-based repayment, artificially low rates, and inability to discharge in a normal bankruptcy

(4) No skin in the game for the originators in housing: the "originate to sell" model of the subprime mortgage brokers meant that they had no risk once the loan was sold regardless of what happened to it. No skin in the game for the originators in education: no university president, no admissions or financial aid officer, nor an Ed Dept bureaucrat will lose a dime if the loans do not perform.

(5) Low underwriting standards in housing: because of the collateral and "long" history of rising RE prices, some people felt that the usual precautions (downpayment, income and credit history) could be relaxed. Low underwriting standards in education: no one is turned down for a student loan, and there is no change in terms for different schools, majors or test scores. One widely-publicized disturbing article describes how for-profit colleges enroll homeless and otherwise vulnerable people to get the grant and loan money.

(6) Extensive subsidies in housing: not just mortgage interest deductability, think 2nd level: road space demands by single-family housing; utility work (length of pipes and wires required). Extensive subsidies in education: at the individual level, you can start with grants, deductions of various expenses, and loan forbearance. At the institutional level, you have tax-exempt status both for operating budgets and endowments, aggressive/abusive use of eminent domain by private and public institutions, federal and state grants, and many other forms of aid.

(7) Credit product hides the true cost in housing: teaser rates, option ARMs, etc. "innovations" brought low introductory payments. Credit product hides the true cost in education: both via subsidized rates and no repayments until after graduation.

(8) Disconnect between price and productivity in housing: the price-to-rent ratio almost doubled vs. the normal levels during the bubble. Disconnect between price and productivity in education: student loan balances just hit $1 trillion. Think about it, if education- in its current form- was such a value-added activity, would you be seeing such drastic indebtedness?

(9) Homeownership expansion was a mission: the emblematic Angelo Mozilo, founder/CEO of Countrywide, said in a 2007 Business Week interview "let me just tell you that Countrywide for 40 years has been on a mission to lower the barriers of entry for the American people to have the opportunity of home ownership." Education expansion is a mission: look no further than professional educrat Obama who proclaimed that "It’s time to make education America’s national mission” and that the "country is not producing enough people with college degrees." With friends like these...

The tide is already turning at the margins (as it did with housing): law schools. Law school graduates have caught on that they were taken for a ride, quite possibly with fraudulent promises, so twelve TTTs ("third tier toilets") are getting hit with class action lawsuits. Good luck to the plaintiffs.