I have previously expressed my opinion that Manchester United (NYSE:MANU) is a great club, but a terrible investment. After having read through the company’s amendments my opinion hasn’t changed. In fact I am even more confident that this stock is a terrible investment.
Details of the IPO
Manchester United is planning to use the proceeds from its IPO to decrease the burdensome debt that was brought on the balance sheet when the Glazer family took over in a leveraged buyout in 2005. With 16.7 million shares being sold (10 percent of total shares outstanding) in a price range of USD 16 to 20, the club will eventually be valued at USD 2.6bn to 3.3bn. That is more than double the value the Glazers paid for the club.
With the stated goal of the IPO being to reduce debt, you would think all the proceeds would be used to pay off loans. That’s where you are wrong! The setup is as follows: the club will sell 8,333,333 shares at USD 16 to 20, which will eventually be used to pay down debt. Meanwhile, the Glazers will pocket the proceeds of 8,333,333 additional shares sold at the same price. So the owners are not entirely looking for investors to help them pay down debt. They will be filling up their own pockets as well.
After the Glazers take their share of the total GBP 210 million IPO proceeds, roughly GBP 100 million will be used to pay down the existing debt of GBP 440 million. This decrease in leverage will surely decrease the club’s yearly interest expenses, leaving more cash (hopefully) for maintaining the squad or facilities.
With the details in table 1 in place, you can see the stock is likely to be traded at a price-to-earnings ratio in the range of 75 to 93 given the company’s estimated profits for 2012. That is VERY expensive for a company that hasn’t really shown attractive earnings or revenue growth in recent years, and shares in a company whose business model is a football club. The valuation simply makes no sense.
Warning signs
With more information being given to us through the amendment last Monday, we have a clearer picture of how the club’s 2012 financial year will pan out. As you might expect, I am not particularly impressed.
I can agree the club has done one thing well, and that is growing its commercial revenue segment, which covers sponsorship, retail, merchandising and product licensing (approx. 35 percent of 2012 revenues). This segment will most likely continue to grow, as the club just announced a record sponsorship deal with the world’s largest carmaker, GM.
However, all revenue streams (commercial, broadcasting and matchday) are heavily dependent on pitch performance, especially broadcasting and matchday revenues (which declined by 12 percent compared to last year). It’s not only broadcasting and matchday revenues that are sensitive to performance: commercial value might also deteriorate over time should the pitch performance get worse.
Despite growing commercial revenues in recent years, total revenues in 2012 are expected to be 3.5 to 5 percent lower than the year before. Revenues were heavily affected by the club failing to qualify for the later stages in the Champions League last year which shows how sensitive revenues are with respect to pitch performance. At the same time as revenues are decreasing, player and staff expenses have increased by 4 to 5 percent. First warning sign! Revenues are slowing down while costs are increasing.
A second warning sign is the massive tax credit the club is utilizing in 2012. As the club had a tax credit of roughly GBP 27m, the club will turn a profit in the year. The tax credit is a onetime thing and won’t help the club to be profitable next year. Had there not been any tax credit this year there wouldn’t have been any profits!
The third warning sign is that total operating expenses are growing faster than revenues. A major factor in running a football club players’ salaries. As the world of football becomes more competitive, salaries have increased significantly. If the club fails to grow revenues at a higher pace than salaries and other costs, you will end up with a significant problem! That is just finance one-0-one.
Conclusion
A stock with little or no growth being priced at a P/E that is higher than 70 – No thanks! It is not like this is a company that can expand its operations to new regions, increase number of games played by participating in more leagues outside its home country or set up a ‘subsidiary team’ elsewhere. The broadcasting and matchday revenues are simply capped to a certain degree. The main factor that can boost revenues is the brands commercial value. That is simply not enough for me to make an investment case out of it.
As for my disclosure I do not intend to take any position in this stock in the future EVER, but I might disclose that I am an Arsenal fan. However, that doesn’t change the fact that Manchester United is a bad investment!
