By David Larrabee, CFA
Manchester United, the acclaimed English Premier League football (soccer) club, is planning to sell stock to the public in an offering that is set to price tomorrow, 9 August 2012. While the team’s iconic brand and loyal following are probably unsurpassed in professional sports, the valuation attached to United’s shares and the risk factors associated with ownership suggest that investors are likely better off sitting this one out on the sidelines.
Manchester United shares will trade on the New York Stock Exchange (NYSE) under the ticker MANU. The club, first founded in 1878, was purchased by the Glazer family in 2005. The Glazers borrowed heavily to fund the purchase and now plan to sell 10% of the company to the public (more details on the franchise’s varied ownership history can be found here). Managed by Jefferies, the offering will raise approximately $300 million, and net proceeds are slated primarily for debt reduction.
There’s no doubt that the franchise is a moneymaker. Forbes recently named Manchester United the world’s most valuable sports team, and as the club pointed out in its multimedia road show, management will look to monetize the brand through new sponsorship, merchandising, and media deals.
So what’s not to like? Well, let’s at least give Manchester United points for candor: the Form F-1 registration statement lists more than 50 risk factors. By way of comparison, the prospectus for Facebook (FB), which operates in the much more speculative arena of social networking, also listed 50 risk factors. Let’s just focus on a few that stand out:
- Don’t expect much financial disclosure. Manchester United is creatively taking advantage of the U.S. Jumpstart Our Business Startups (JOBS) Act to go public. Designed to assist “emerging growth” companies in raising capital, this law exempts the company from attesting to its internal financial controls for up to five years. Also, Manchester United will not be required to file quarterly financial reports or report financials under generally accepted accounting (GAAP) principles.
- Dual share class structure. The Glazers will be selling 10% of Manchester United in the form of Class A shares, which are entitled to one vote per share, while retaining control of the Class B shares, which are entitled to 10 votes per share. Such a structure allows the Glazers to retain more than 98% of the voting power.
- No dividends. There is no intention to pay dividends to Class A shareholders. In April of this year, the Glazers awarded themselves a dividend of approximately $15 million, and transactions of this nature have opened them up to public criticism that they have treated the club as their personal “piggy bank.”
- Competition impacting margins. As the Economist recently pointed out, new billionaire owners of rival clubs — including Chelsea, Paris Saint-Germain, and crosstown rival Manchester City — perhaps without a keen eye on the bottom line, have opened their wallets to acquire top talent, raising the cost of elite players and pressuring clubs, including Manchester United, to spend more to keep up.
Not listed among the risk factors in the prospectus, but hard to miss, was news that earlier this year the club tried to go public in Hong Kong and Singapore — only to have the offerings canceled due to local opposition to the share class structure and lack of demand. It has also been reported that Morgan Stanley, likely chagrined following the firm’s Facebook debacle, dropped out of the underwriting syndicate over concerns about the expected valuation of the shares. Manchester United’s shares are expected to be priced at about six times revenues — for perspective, Apple (AAPL), another global brand with a loyal following, sells at 5.3 times revenues — and the company is expecting to report a loss from continuing operations for the most recent fiscal year ending 30 June.
Manchester United may be a storied franchise, but that doesn’t necessarily make its shares a wise investment. In my view, management deserves a yellow card.