As most everyone is already aware, former Microsoft CEO, Steve Ballmer bought the Los Angeles Clippers for $2 billion pending approval from Donald Sterling. He bought THE CLIPPERS for $2 billion!! The Clippers although seeing success in recent years, have long been one the worst franchises in NBA history. The Clippers have an all-time record of 1360-2200 that's only a .365 win percentage. The team only has ten playoff appearances in its 43 years and no NBA championships. So why would someone buy a franchise like that for $2 billion? Well you're probably thinking the lucrative Los Angeles TV market obviously. Yes, that certainty helps make the investment look more attractive, but the real reason the Clippers commanded a hefty two billion dollar price tag is because there are more billionaires that want to own professional sports teams than there are sports teams themselves. So the scarcity of professional sports teams usually forces bidding wars like the one recently seen in the pending sale of the Clippers. It's simple economics. Forbes only valued the Clippers at $575 million in January of this year. That means the team's value nearly quadrupled in just 5 months!
Investors have overlooked Manchester United:
Since the pending sale of the Clippers on May 29th, investors have been snatching up shares of Madison Square Garden (NASDAQ:MSG), which are up about 8%. Madison Square Garden is home to the NBA's New York Knicks and the NHL's New York Rangers. The suddenly upstart New York Rangers' playoff success is making up for lost revenue of the Knicks' failures. But the Knicks will surely bring in more revenue next year with the legendary, 11-time NBA Champion, Phil Jackson running the show. While Madison Square Garden is a good way to play the recent pending sale of the Clippers, investors have overlooked one of the greatest sports franchises in the history of the world, Manchester United (NYSE:MANU). I think investors automatically set their focus on Madison Square Garden because:
1) It houses a fellow NBA Franchise
2) The Rangers' recent success
3) Both are familiar American sports teams
4) The large market of New York City
Here's why investors have overlooked Manchester United since the pending Clippers sale:
1) It's European
2) It's soccer
3) They don't understand the magnitude of the brand and how soccer's popularity dwarfs that of the NBA and NHL.
Since the pending Clippers deal Manchester United's stock has risen 6.4%, but it should have seen much greater gains. According to Forbes, Manchester United is the world's second most valuable sports franchise at $3.165 billion, only behind Spanish soccer powerhouse Real Madrid. Also, four out of the top ten most valuable sports franchises on the planet are soccer clubs.
Manchester United's History of Excellence:
In its 136-year history, Manchester United has won 62 trophies. The club plays in the top soccer league in the world, The English Premier League and has won a record 20 league titles. In the 1998-99 season, Manchester United won all three major European soccer competitions, including its league title, the FA Cup, and the UEFA Champions League.
Manchester United's Profound Global Brand:
Manchester United has more than 659 million fans around the world. The club has sold out all its Premier League games, since the 1997-98 season. During the 2012-2013 season, Manchester United attracted over 47 million viewers per game. That's over 13 million more views than the average for this year's NFL Divisional Playoff round of 34.3 million per game. Manchester United has over 50 million likes on Facebook, dwarfing the New York Yankees 7.6 million and the Dallas Cowboys 6.8 million. Oh and that's about 41.1 million more likes on Facebook than the Los Angeles Clippers, New York Knicks, and New York Rangers combined. Manchester United's brand is so powerful and lucrative that it recently stuck a record-breaking deal for its jersey sponsorship with General Motors that will pay Manchester United $559 million over seven years starting with the 2014-2015 season. The club also has sponsorship deals with leading companies such as Nike, Aon, Bulova, bwin, and DHL.
Why Manchester United is worth significantly more than the Clippers and both those teams that play at Madison Square Garden:
Besides Manchester United's incredible brand value and historical success being much greater than that of the Clippers, Knicks, and Rangers, here are some other reasons the club is worth so much more:
Soccer is much more popular than the NBA and NHL. Soccer is the world's most popular sport with an estimated 3.3-3.5 billion fans, a little over half the world's population.
The Staples Center has a capacity of 18,118 so for 41 homes games, excluding playoffs and preseason, the Clippers can draw a maximum of 742,838 fans a year. Manchester United's world famous Old Trafford Stadium has a capacity of 75,811 so for the club's 18 yearly English Premier League home games, excluding other European competitions, the Red Devils can draw a maximum of 1,440,409 fans a year.
Since the pending sale of Clippers, the value of some of the NBA's hallmark franchises has skyrocketed. According to Business Insider, The New York Knicks went from an estimated previous value of $1.4 billion to $4.87 billion. The Los Angeles Lakers went from $1.35 billion to $4.70 billion. The Chicago Bulls went from $1 billion to $3.48 billion. The Boston Celtics went from $880 million to $3.04 billion. And the list goes on. If these sports franchises increased that much in value, then Manchester United's, a franchise that was already valued higher than all of these NBA teams, value must have gone up astronomically. The Knicks' value increased by almost 3.5 billion dollars. So Manchester United, which was previously valued at 3.165 billion more than 2.25 times the previous value of the Knicks at 1.4 billion, must now be worth a little over 11 billion dollars. This $11 billion was calculated by taking the Knicks 3.5 billion dollar valuation increase and multiplying it by 2.25 (the multiple at which Manchester United was previously valued over the Knicks) and then adding that number to the club's past value of $3.165 billion. I believe this $11 billion valuation is justified factoring in soccer's popularity, greater seating capacity, extremely lucrative sponsorship deals, the franchises worldwide brand and historical success.
Possible Flaws In The New Valuation:
The new valuations for the NBA franchises above only came from one source, so it may not be indicative of the entire market. The new valuations are based off of what someone would be willing to pay for the franchises if the teams were for sale and are not solely based on the actual value of the teams' current assets. So although the new estimated value of the Knicks, which is more than the entire current value of Madison Square Garden may seem outrageous, it is based off of the subjective value of the franchise not the actual value. Also, it is possible that the sale of the Clippers has set a price floor for the purchase of professional sports franchises, however the upper-echelon franchises may not increase in value at the same rate as the lower ones have.
Manchester United's Fundamentals:
Manchester United currently trades at a trailing P/E ratio of 12.43, which is well below the market average of about 19.5. Also, Manchester United has an extremely low forward P/E ratio of 5.11. In a down year on the field for Manchester United, the company posted record revenues of 115.5 million pounds in the third quarter. This represents a 26% increase in revenue year-over-year. This overall increase in revenue was due in part to the rise in Sponsorship Revenue up 43.5%, and in Broadcasting revenue up 64.1%. Also, EBITDA increased 60%. Manchester United's fundamentals demonstrate that the stock is currently undervalued.
Potential Risks To Investing in Manchester United:
To be quite honest, I do not really see there being much risk to investing in Manchester United at this point. The popularity of professional sports teams always seems to be rising, therefore increasing the demand for their products and driving up revenue. But over the long term, if the team continues to perform poorly, then in all likelihood Manchester United will lose fans and demand for their products will drop, resulting in decreased revenue.
The Final Word:
Steve Ballmer's ridiculous pending purchase price for the Clippers will probably end up being a good long-term investment due to the scarcity of professional sports franchises and the fact that with the purchase he single-handedly raised the value of professional sports franchises everywhere. With this run up in the value of sports franchises, Manchester United is currently undervalued. Its stock should be trading at much higher levels than were it is right now. Since the pending sale, traders have seemed to focus more on Madison Square Garden because they do not understand Manchester United's global reach. Buying stock in Madison Square Garden right now is not a bad idea, but the value of the two sports franchises that play there combined do not even come close to equaling the value of Manchester United. At current levels, Manchester United is a strong buy.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.