Seeking Alpha
Profile| Send Message| ()  

Manchester United (MANU) is one of the biggest soccer clubs in the world and (at the time of writing) has just won the English Premier League title. This article will examine the stock to see if it is a worthwhile investment.

The depth and breadth of customer loyalty that the Manchester United brand generates is very attractive. For some of the more extreme examples of fan loyalty, you can Google "Manchester United tattoo." A recent survey estimated that 659 million people worldwide "enjoy following Manchester United."

Manchester United is becoming very effective at leveraging the strength of their product (the team's current performance) and the brand (the very strong history of success) into commercial opportunities.

Because a soccer club is not a very standard business model, this article will start by breaking down how the business makes its money. The business is divided into three segments - Commercial, Broadcasting, and Matchday.

The Commercial segment consists of Sponsorship, Merchandising, and New Media. Overall the Commercial segment currently produces £118m per annum (36% of total revenues). Sponsorship revenue was about half of this segment - £61m last year (up from £41m in 2010). The first shirt sponsor paid £500,000 in 1982 for a five-year deal. The recently signed deal for the 2014-21 seasons is worth $80m pa (~£53m). Manchester United was also the first soccer club in England to arrange a sponsorship deal for their training kit which is indicative of both their commercial power, and their drive to find new sources of revenue.

The Merchandising segment is currently managed by Nike (NKE), and the company receives 50% of the profits from the sales of licensed apparel and other products. This was £34m last year, up from £26.5m in 2010. New Media (website, social media, mobile phone apps, etc) is the smallest but fastest growing of the segments - currently it produces £21m pa up from £10m in 2010. Over 90% of this segment's revenue is generated by the MU Mobile brand (mobile content including videos). This is currently only available in Africa and Asia, so there is real potential for growth if and when they introduce the service to developed markets.

The Broadcasting segment is currently £104m pa (33% of total). It consists of Manchester United's share of the television revenues of the soccer competitions they participate in. They also run their own premium channel (Manchester United TV) that is available in 54 countries. When Manchester United does well in the competitions they participate in, they receive more broadcasting revenue. However, one important thing to notice is that broadcasting revenue will rise dramatically next season thanks to the Premier League's new television rights deal; there is approximately 60% more money available for the league to share out (this money is just over 50% of Broadcasting revenue for the company). A crude estimate therefore suggests Manchester United will increase Broadcast revenues by at least 25% next year (so perhaps a 10% growth in gross revenue) even if they do not perform better in the Champion's League (as fans obviously hope they will)

The Matchday segment is currently £99m pa (31% of total). It consists of revenues from soccer matches and other events held at Old Trafford (their stadium). There is no room for much growth in this segment, as average attendance for Premier League matches (the main competition they participate in) was 99% of capacity since 1997 (even after completing a stadium expansion). However, the excess demand for tickets means that Matchday revenue is not likely to shrink significantly in the future.

Currently (FY 2012), the three segments are approximately equal in gross revenue. However, the trend is very clear - Commercial revenue has grown by 72% since 2009 while Matchday is down 14% (although some or all of this can be attributed to poor on-field results in knockout competition during this time). Broadcasting is basically flat during the period, growing just 6%.

Financials

Manchester United achieved a 28.7% gross profit margin last year. This is lower than the previous three years (all just over 33%). This was because of reduced broadcasting and Matchday revenue (mostly due to poor on field performances in the knockout competitions). Cost of revenue only rose 2%, which is below inflation, so is not a worry.

Unfortunately, their net margin is only 7.2% because of interest payments. The club is £421m in debt with "finance costs" of just over £50m last year. The debt is 130% of annual revenue at the moment (although both are moving in the right direction). Currently, it would take 18 years of profit to pay back all the long-term debt.

This debt was taken on as part of the Glazer family takeover of the club (and is one of the major reasons that the team's majority owners are rather unpopular with the fans). Here is a much better analysis of the debt situation than I could provide. The short version is that both Manchester United and the Glazer family are in quite a lot of debt. The Glazers need to take a lot of money out of the club to pay for their debt which may hurt the club's future prospects (the interest payments are definitely a drain).

Management Change

Sir Alex Ferguson retired from managing the team after 26 years in charge. He is one of the greatest managers of all time, so there are definite and real concerns that the club will not perform as well as they have in the past. The shares dropped 5% when the retirement was announced (although they have now recovered slightly). While his retirement is obvious a major news story, there are two reasons that it should not concern investors. Most importantly, the financial results of the shares are relatively well insulated from the team's results on the field. The majority of their revenue is almost guaranteed at least on a year-to-year basis as their performance and fan base are very consistent.

Secondly, the new manager has been very successful with his previous club, so we may not see much or any decrease in performance. Sir Alex is remaining with the club as a director, so his prestige and wisdom will still be available to help with player recruitment and commercial opportunities. The team has many excellent players who should be able to do well with almost any manager.

Bookmakers are suggesting there is at least a 93% chance that Manchester United will qualify for the Champions League next year (by finishing in the top 4). They are also equal favorites to win the League title next year (about a 33% chance), so it looks likely that results-driven revenue will not suffer due to this change. It is possible that extra demand for "Fergie" memorabilia will actually increase this year's merchandising revenue.

Company Structure

To put it plainly, the corporate structure is terrible for external owners. There are two classes of shares, A and B. The B shares have 10x the voting power of the A shares and were not sold to the public. For special resolutions (that require 67% of the vote, the B shares will always be weighted to have 67% of the vote). Red Football LLC (the Glazer's holding company) currently has 98.7% of the voting power. If you buy shares in Manchester United, you are completely at the mercy of the Glazers.

This structure is one possible reason that Manchester United has only 11% institutional ownership. When a company with $3B market cap attracts this little interest from professional investors, it is a warning sign, no matter how negative your opinion of the professionals is. There are not a lot of close comparisons, but Madison Square Gardens ($4.6B market cap) has 74% and International Speedway Corporation ($1.6B) has 56% institutional owners. Shareholders in Manchester United are, to no small extent, at the mercy of the Glazer family.

Overall

Overall, Manchester United is potentially a fabulous business - there is no better moat than customers who tattoo your brand on their skin, and there is some exciting potential for revenue growth. However, it is weighed down by significant debt and both the corporate structure and the ownership could be very dangerous for public shareholders. Both of these risks could amount to nothing, and the success story could continue, but they make this more of a gamble than an investment (and if you are going to gamble on a soccer team, bet on their results on the field, not in the boardroom).

Source: Manchester United's Stock: Superstar Or Also-Ran?