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Report: Nike to pass on renewing Manchester United deal

  • Nike (NKE) will end a long-time deal to supply Manchester United (MANU) with soccer kits after its current contract expires, according to Reuters.
  • The 7th-place soccer club was looking for a new sponsorship deal at around £60M ($102.1M) per season.
  • What to watch: Nike isn't expected to go overboard trying to nab deals with other top European teams with its DNA in backing the top individual stars in a sport, rather than clubs or teams. Adidas (ADDYY) will likely have talks with Man U. about replacing Nike.
Comments (10)
  • dafjev
    , contributor
    Comments (30) | Send Message
     
    So Nike, the largest sportswear producer in the world and hence the company with largest scale and distribution reach and lowest production costs, thinks that at £60m/year this deal is so overvalued that it is walking away despite losing the Manu exposure...What are the bulls (alias Ron Baron and Lansdowne) still holding onto?? FY16 earnings estimates have already fallen -65% (note that this is after returning into champions league AND renewing Nike deal). These estimates will probably have to be cut by another -50% which means that MANU will be on ~100x P/E and free cash flow will be negative for at least another 5 years...How can anybody rational buy/hold these shares??
    8 Jul 2014, 09:32 AM Reply Like
  • nooseah
    , contributor
    Comments (519) | Send Message
     
    Well, well, well .... what a surprise!

     

    dafjev and I have been warning the MANU bulls for ages.

     

    The MANU management are in cloud cuckoo-land if they think anyone is going to hand over £600m over 10yrs. Adidas are rumoured to be in the running now that Nike have pulled out, but would they pay £60m per year? Of course not - they only pay Real Madrid £31m per year and Real Madrid are European Champions. Do the math ..

     

    I wonder if the club have already spent the money they were expecting Nike to cough up ...
    8 Jul 2014, 08:40 PM Reply Like
  • damie225
    , contributor
    Comments (23) | Send Message
     
    Well, well, well...looks like you spoke too soon minimum guarantee of £750 million ($1.3B) subject to certain adjustments of course. Adidas is expecting total sales to reach £1.5 billion over the course of the deal.

     

    Despite their bad season, Utd still had 3games among the top 10 most watched games in the US last season. With sold out tour games later this month. You may have underestimated the Man Utd brand and their fan base.
    14 Jul 2014, 11:31 AM Reply Like
  • dafjev
    , contributor
    Comments (30) | Send Message
     
    It is indeed surprising that Adidas agreed to this size deal, especially if you consider that Nike, who have all the info possible because they have run this business for the past 13 years, made a public announcement that a deal at this level is unprofitable.

     

    That said, this deal is not much higher than what analysts were already expecting and is in fact still less than the £80m/yr that the company guided analysts to at the time of its IPO.

     

    In addition, with the chevy deal and kit supply deal now fixed for a decade, revenue will basically stop growing post FY16 while costs will continue to rise so earnings will start declining post FY16 peak of 20p (assuming they manage to improve performance - otherwise they are bust). Paying 60x FY16 P/E for declining earnings and 4x leverage doesn't sound like an attractive proposition to me...but perhaps you disagree
    15 Jul 2014, 08:22 AM Reply Like
  • damie225
    , contributor
    Comments (23) | Send Message
     
    Nike did say it was unprofitable but for their shareholders and not for Utd. Utd made £8.4 (£28.2 YTD) in Retail, Merchandising, Apparel & Product Licensing revenue for the third quarter so Adidas basically paid 2.2x on a quarterly basis.

     

    As per revenue, so far the Glazers have shown they know how to monetize a brand with the slue of deals being signed. I expect them to continue to be aggressive signing new commercial deals etc. that will generate revenue. I do not like the debt levels thou.

     

    Depending on the team's performance, season ticket prices which have been frozen over the past 2-3 seasons may also increase and there is the allure of prize money from various competitions. The EPL TV contracts are also improved for the new season. Utd also has an academy that generates funds from player sales. There are a lot of other channels for growth, all is not gloom.
    15 Jul 2014, 09:50 AM Reply Like
  • nooseah
    , contributor
    Comments (519) | Send Message
     
    " I expect them to continue to be aggressive signing new commercial deals etc. that will generate revenue."

     

    This view chimes with much of the rhetoric around the potential earnings for tech companies e.g. Facebook and a host of others. What people appear not to realise is that there really is only a finite amount of money available for marketing (globally or otherwise) and with most of the world's major economies exhibiting slow growth (at best) one wonders where this huge boost to earnings (and therefore marketing budgets) is going to come from?

     

    Not to mention, of course, that this "slue" (sic) of commercial deals (that you appear to believe are available to be done) is likely to be contingent on the club's success on the pitch, both domestically and in Europe.
    16 Jul 2014, 08:30 AM Reply Like
  • dafjev
    , contributor
    Comments (30) | Send Message
     
    I never said this was unprofitable for MANU. I said it was hard to believe it would be profitable for Adidas.
    Re-Glazers monetizing the brand, the 2 key drivers of this are the shirt sponsor and the kit supply, both of which have now been set until the end of this decade. All the rest is tiny potatoes... annual revenue from each of these other deals (and they announce one every month or so) barely covers 1 week of salary for 1 of their key players. It's totally irrelevant in the big picture.

     

    Finally, the TV contracts are also set now for the next few years so that will not grow either.

     

    Oh yeah and ticket sales...Matchday revenue has been flat for the past 7 years...i wouldn't bank on much upside there either.

     

    In summary, the upside has been squeezed out and going forward you get flat to low single digit revenue growth with declining earnings due to cost inflation...for 60x 2 year forward earnings
    15 Jul 2014, 10:56 AM Reply Like
  • damie225
    , contributor
    Comments (23) | Send Message
     
    Well, there is the £17M per year they receive from AON for the training kit and the Carrington training ground. Most of the other deals (there are 29 listed sponsors on their website) they don't announce the $$$ values but we know Singha, BWIN and Casillero have at least £2m sponsorship deals with Utd and £34M in cash. Picked up Nissin has a sponsor today.

     

    And Matchday revenue was up 9% according to Q3 numbers. They also announced this week season tickets have been sold out, earliest this happened since Old Trafford got expanded in 2006.

     

    Stating the facts which I don't believe justifies 60x forward earnings when there is clearly potential for growth especially if they can get themselves back into the champions league. Single digit maybe but only time will tell how well they fair financially.
    16 Jul 2014, 01:01 PM Reply Like
  • damie225
    , contributor
    Comments (23) | Send Message
     
    @nooseah Sports is one of the sectors that sometimes defies logic. The Knicks haven't been to the Eastern Conference finals in God knows how long not to mention winning a championship but they have been the most profitable NBA franchise over the past 5years. A lot has to do with branding, fan base and how you market your brand.
    16 Jul 2014, 01:10 PM Reply Like
  • dafjev
    , contributor
    Comments (30) | Send Message
     
    @damie225 Firstly i want to express how glad i am to find someone to discuss this with who is actually informed about the numbers in this business. My general impression is that the people buying/holding this stock simply don't have a clue how bad this business is.

     

    Regarding AON sponsorship, i believe the actual numbers are a bit lower than what you state, but regardless of that this deal like the others we discussed is locked in until 2021. So now if you take the c.£180m they are expected to generate from commercial revenue this year, only c.£40m is from the 29 sponsors you mention on the website combined or slightly over £1m per deal...and this includes the higher profile/value deals such as Bwin which you mention. How much do you think they get paid by a korean pharma company to have some kind of "co-branding". These deals are all tiny.
    So, the vast majority of commercial and broadcasting revenue (including AON, Chevy, Adidas, etc.) are now fixed until next decade. The small deals can add maybe £10m/year in revenue assuming they do a deal a month (which is above the current run-rate).
    Wage costs are rising by c.£20m/yr and player capex/amortization is also rising by £15m-£20m/yr.
    Net-net they will start seeing earnings decline £20m-£30m/yr post FY16...

     

    Looking at matchday revenue on a single quarter is irrelevant because of the timing of home games which can shift from year to year. An an annual basis (including this year) matchday revenue hasn't grown in the entire period for which we have reported results. In addition, the company already said they will keep prices flat again next year and matchday revenue will obviously be down as they are not participating in European football. The stadium is always sold out so the timing of when it gets sold out is irrelevant. The relevant point is that capacity is not growing and prices are flat so there's no reason to expect any growth in matchday revenue.

     

    Not sure what you meant to say by them having £34m in cash (against £370m in debt)? Anyhow that cash (and then some) will be gone by the end of next month with the transfers they are currently doing. (already spent £60m so far and are only getting started)
    17 Jul 2014, 06:11 AM Reply Like
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