- Sports teams are exploding in value.
- Manchester United gives investors exposure to a premier team in the most popular sport.
- Recent on-field performance has been poor, but it should improve.
- The company is hard to value, but I think it will be much more valuable in 5 years than it is today.
Contrary to what US sports team owners would like us to believe, owning a sports team is (clearly) a tremendous business. Though financial records are not public, the NFL recently raised its salary cap by $10 million per team (or $320 million total), MLB owners continue to shell out record contracts, and basically no NBA teams are for sale, though several ownership groups would love to get their hands on one. After seeing the explosion in franchise value in the US's big three sporting leagues, it seemed only fitting to investigate the world's most popular franchise in the world's most popular sport-the publicly traded Manchester United (NYSE:MANU).
History of the Franchise
While some Americans remain quick to loathe soccer, there is little doubt about its global popularity. And it makes sense. All anyone needs to play is a ball and something that resembles a net. In fact, for these reasons, soccer and basketball should remain the world's two most popular sports for the foreseeable future.
As for Manchester United, it is an English soccer team with tremendous heritage. Founded in 1878, Manchester United has a long legacy of success, capturing 20 English Premier League (EPL) titles, 11 FA Cup titles, and various European championships. American investors can think of the team as the New York Yankees of English soccer. The team plays in the historic Old Trafford Stadium in Greater Manchester, England.
Through the years, the team has housed many of the world's top superstars including Wayne Rooney, David Beckham, Christiano Ronaldo, Ryan Giggs, Dennis Law, Gary Neville, and Sir Bobby Charlton. The cohort may not be full of everyday names, but several of these players have left lasting legacies at Old Trafford.
The team really soared in success during the tenure of previous manager, Alex Ferguson. Ferguson created a consistent, dominant franchise for nearly 27 years, importantly, concurrent with the explosion of global TV and Internet broadcasting. As much as sports fans hate to admit it, winning attracts fans, and Manchester United won a lot during a key time when people from around the globe could become fans. The team has won 13 English titles since 1993 and 2 European Cup Championships.
Current State of the Team - Competitively
Manchester United has had a nice run in the past few years. The team won EPL titles in 2010, 2011, and 2013 and finished in a tie with cross town rival Manchester City in 2012. Unfortunately, 2014 has not been great for the Red Devils. With new manager David Moyes at the helm, the team currently sits 6th in the EPL standings, 9 points out of the critical fourth place spot with only 10 games to go. Fourth place is incredibly important in the EPL because a Top 4 finish allows the team to qualify for the UEFA Champions League.
The UEFA Champions League is a competition amongst the best soccer teams across Europe to determine an "ultimate" champion. Needless to say, this tournament scores great ratings, attendance, and provides teams with tremendous global exposure. The Champions League Final in 2011 between Manchester United and Spanish power Barcelona courted 2.6 million viewers in the US-the most ever for a UEFA soccer match. Fox (NASDAQ:FOXA) was excited enough to renew its rights to broadcast the match for three years after the success of the 2013 final.
Manchester United will definitely lose out on some revenue if it fails to qualify (as it likely will); however, given the team's current performance in the EPL, it seems unlikely that it would go far in the Champions League tournament.
If winning cures all ills, then losing causes its fair share. Star players have recently seemed discontent. Star player Robin van Persie seems upset with his role on the team. Mexican striker Javier Hernandez is also upset about being relegated mostly to reserve status, and Moyes may be interested in selling him when the transfer window opens.
With van Persie and Hernandez possibly exiting, the team will have to pay big money to attract stars from other teams or hope that young talent develops. This strategy can be expensive. Young German star Toni Kroos may be interested in joining the team, and while he would be helpful on the field, he may also be a great investment. Manchester United is interested in acquiring players now that it may be able to sell for big money in a few years. The firm did as much when it sold the world's best player, Christiano Ronaldo, at the peak of his career for £80 million-the equivalent of $132 million at current exchange rates. That is simply for the privilege of purchasing the player, and it does not include his salary.
That being said, the next few seasons could be tough for Manchester United, though unexpected transactions can occur all the time, and young players can always develop into stars. Such is the great thing about sports.
I have spent a lot of time discussing Manchester United's competitive position, and rightly so-since shareholders have no power to enact change on the pitch, it seems appropriate to discuss one of the main levers of the team's popularity (and revenue potential).
As far as the top line goes, the company has had uneven performance year to year, yet the company has still achieved a CAGR of 6.9% since FY09. Let's not forget that Europe, the US, the UK, and most of the developed world has experienced recessions in the time period. Plus, because of the firm's performance in a given season, broadcasting and ticket revenue can swing annually.
As far as profitability is concerned, Manchester United has experienced great levels of volatility. In FY09, for instance, the club sold Ronaldo for £80 million ($132 million), thus the club booked an exceptional operating profit of £123.5 million ($205 million). Given the club's more regular gain on sale of players, earnings power has grown modestly. I suspect it will go on growing forward, but I shall discuss this later.
What does concern me slightly about Manchester United's financials is its huge debt load. Billionaire Malcolm Glazer added significant financial leverage to the team. Thus, Manchester United paid upwards of £70 million ($116 million) in interest payments in FY13 and has £341 million ($566 million) in long-term debt. However, the company largely refinanced its debt in June of 2013, and thus its interest expenses are down considerably year-to-date. I think the lower cash costs of interest servicing will serve the company well when it comes to adding more talent to the club.
Revenue and Profits will Grow
Revenue performance going forward is going to be substantially stronger. The club signed a sponsorship deal with GM's (NYSE:GM) Chevrolet that begins in 2014 and will pay Manchester United $70 million in the first year, with the rate growing 2.1% thereafter. For perspective, the average annual jersey sponsorship proceeds from Aon from 2010-2014 were £19.6 million ($32.5 million) and will jump to £49.2 million ($81.7 million) with Chevrolet. Additionally, Nike (NYSE:NKE) will be more than doubling its annual commitment to produce Manchester United jerseys and apparel. The athletic apparel giant inked a 10-year, $1 billion contract with Manchester United. This will provide at least $100 million more in annual revenue.
Additionally, Barclays (NYSE:BCS), currently the sponsor of the EPL, will see its sponsorship end after the 2015-16 season. Given the EPL's exploding popularity in the US, I suspect the EPL will command a pricier sponsorship than it did under Barclays. Since EPL teams share this revenue, it will provide some upside to Manchester United's revenue generation.
As I stated previously, interest in US viewership is soaring. Executive Vice Chairman Ed Woodward noted on the firm's Q2 conference call:
"We've got incredible number of people on Facebook and our other social media platform and they're highly engaged from the U.S. where we have now we think as many if not more fans in the U.S. compared to in the U.K. And early stuff coming out of the NBC shows an increase of about 78% viewership this year compared to last year on the FOX and the ESPN platforms in terms of the U.S. audience which is obviously extremely positive."
Increased viewership will lead to more lucrative TV deals going forward. The US soccer market is still in its infancy relative to other sports, and I only see it growing in popularity, particularly if parents push their children away from more dangerous sports like [American] football.
What's Manchester United Worth?
Valuing Manchester United can be somewhat difficult due to the need to convert between the US listing value and its GBP reporting figures. For those unaware, pence is the equivalent of a cent, so when Manchester United reported earnings per share of 13.45 pence, it is not equivalent to $13.45 but rather $0.1345. Due to the exchange rate, Manchester United has earned roughly $0.22 per share. If the company earns somewhere in the neighborhood of $0.50 per share, that would value MANU at roughly 32x earnings.
That sounds awfully expensive; however, free cash flow generation is going to be significantly better after the debt refinancing. Further, I see revenue growth remaining strong for years to come due to the value of live sports, as well as MANU's ability to get its products to more households around the globe. Broadcasting fees should experience upward momentum for the next several years.
Also, I think the Glazer family will be able to capitalize on some of the successful strategies currently implemented in American sports. Such includes signing players like Ronaldo and Kroos before their respective peaks, enabling the club to sell to other teams desperate for their services. The club may also start focusing on different team building strategies with emphasis on value that can borrow heavily from advanced metrics.
Ultimately, revenue is going to grow significantly in FY15/FY16 with the Chevy sponsorship and new Nike deal kicking in and I imagine it will flow through to the bottom line. Additionally, investors get one of the most prestigious soccer brands in the world at a valuation of roughly $3 billion. Billionaires and companies with incredible amounts of cash are always prone to overpay for sports organizations-hence the recent acquisition of the Dodgers by Guggenheim for more than double the previous baseball team sale record. It is hard for me to say exactly what Manchester United is worth, but at an enterprise value of just $3 billion, I would bet that the soccer organization is worth considerably more in 5 years than it is today.