Manchester United: Impact Of Man City Valuation

Dec. 01, 2019 11:19 AM ETManchester United plc (MANU)4 Comments3 Likes
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Summary

  • Manchester City announced it received a private equity investment that values the club at $4.8 billion.
  • Rival Manchester United, once the most valuable sports franchise in the world, is not even the most valuable soccer team in its city anymore.
  • Struggles in recent years on the field have impacted Manchester United's valuation as it has struggled to consistently contend for trophies and lucrative Champions League payouts.
  • Despite MANU struggles, it is still a powerful soccer brand that Man City still yearns to become. MANU outsold Man City in commercial revenue last year by a wide margin.
  • If MANU can continue to improve on the pitch, today's valuation of just $3 billion may look like a bargain in the future.

Thesis

Recent news of a private equity investment in English Premier League soccer club, Manchester City, sent shares of Manchester United (NYSE:MANU) soaring. As I stated in a previous article, one could argue that Manchester United's ~$3 billion valuation was a discount to other prominent sports franchises.

It was reported that rival English football club, Manchester City, sold a 10% stake in its club that valued the team at $4.8 billion. This is a remarkable valuation -- ~6.5x next year's sales -- considering Forbes in July estimated that Manchester City was worth no more than $2.69 billion and considering that Manchester United, a global soccer brand that had been the poster boy for English soccer until recent years, currently has a valuation -- $3.08 billion -- that is more than a 40% discount to Man City's new valuation.

News of Man City's updated valuation sent MANU up 11% the day of the news. Despite the increase, MANU is still 41% off its 2018 high of $26. There are reasons for MANU's depressed valuation. The team is carrying a lot of debt and the team's play on the field has struggled in the years since soccer coaching great Alex Ferguson retired in 2012.

That said, Manchester United remains a global soccer behemoth from a brand standpoint. Almost everybody has heard of Manchester United, and you can't say that about too many professional sports franchises. If the team continues to improve, or Manchester United ownership sells the team, MANU investors could receive a rich premium to its current valuation.

Man City: Great Play Increases Team Value

Manchester City was an also-ran in Manchester soccer until the last decade. The club was bought by a United Arab Emirates billionaire in 2008. Since then, the focus of the club has been a continued investment in winning, and the club is now one of the best in the world. Man City have won three of the last six English Premier League titles and have been strong contenders in the prestigious Champions League tournament, though the team has never won the Champions League.

The recent announcement that Man City had sold a 10% stake in the club that valued the club at $4.8 billion sent shares of rival Manchester United up as much as 13% in one day before shares settled the day up 11%.

As of this writing, MANU has a market cap of $3.08 billion following the 11% increase. The fact that Man City is now more valuable than Manchester United is kind of stunning. In 2012, Forbes estimated that Manchester United was not only the most valuable soccer team in the world, but the most valuable sports franchise in the world.

In July of this year, Forbes published its updated list of the 50 most valuable sports teams in the world. The article speculated that Manchester City was worth $2.69 billion. The new Man City valuation this week places a 78% premium on the July Forbes estimate. Not only is Manchester United not the most valuable franchise anymore, it's not the most valuable soccer franchise anymore, and it's not even the most valuable soccer franchise in its own city anymore.

MANU: Rough Year On Pitch = Less Revenue

It's been a tough year for Manchester United. The team finished sixth in the English Premier League. Manchester City won the Premier League. While sixth place isn't a terrible finish in a field of 20 teams, it did mean that MANU did not qualify for the illustrious Champions League tournament this year. The Champions League tournament pits the top club teams in Europe against each other and culminates in a title game.

As a result of MANU being excluded from Champions League, its revenue will contract in 2020 vs. 2019 due to exclusion of additional broadcasting revenue and bonus payments from Champions League participation.

In English club soccer, winning helps build brand value. For Manchester United to remain the all powerful Manchester United brand, the team must contend for both the Premier League and Champions League almost every year. It's a virtuous cycle. When the team is great, it is a contender for the Premier League title. If it finishes in the top four of the Premier League, it qualifies for the Champions League tournament. If it qualifies for the Champions League tournament, it has a greater likelihood of retaining and attracting top soccer players who want to play for the Champions League title.

When the team participates in the Champions League, it pulls in additional broadcasting revenue for more games played. If it is a close contender for the Champions League title, that success adds more power to the brand. If the brand has more power, the team gains more marketing leverage and can sell more merchandise, demand more money for brand sponsorships, etc.

While Man City is contending for the Champions League this year, Manchester United is participating in the second-tier Europa League tournament. If the Manchester United wins the Europa League tournament it will qualify for next year's Champions League tournament. The club could also qualify for next year's Champions League tournament if it were to finish in the top four of the English Premier League, but as it stands right now Manchester United will likely finish somewhere in the middle of the standings by season's end as the team continues its rebuilding phase this season.

Man City Valuation vs. Man United Valuation

Man City is a private club, but it publishes an annual report. It recently announced that it generated £535.2 million, or $690 million in 2019 revenue. This was a 7% increase over the prior year. If we assume the club grows revenue another 7% next year, that gets us to $738 million, which means Man City is currently valued at 6.5x next year's sales at $4.8 billion.

By comparison, Manchester United is expected to generate revenue of at least £560 million, or $723 million, this year. If Manchester United commanded a P/S valuation multiple similar to Manchester City, MANU would be worth $4.7 billion, which is a 54% premium to the company's current $3.08 billion valuation. Last year, there were media reports that the Saudis were interested in buying Manchester United for $5 billion, but that the Glazer family, which owns the team, rejected the offer.

The Man City $4.8 billion valuation doesn't mean Manchester United is automatically worth $4.7 billion. As stated above, Man City is winning these days and Manchester United is not. Winning creates value. And Manchester United is in a rebuilding phase. But winning isn't the only thing of value here. Brand power matters as well. And I don't think it's a stretch to argue that Manchester United is a global soccer brand that Manchester City still aspires to become. Your neighbor who hates soccer in rural Ohio has probably heard of Manchester United. She's probably never heard of Manchester City.

One of the primary line items in revenue for both clubs is commercial sales, which includes merchandise, jerseys, etc. While both clubs have similar overall revenue totals last year, Manchester United's commercial line item came in at £275 million vs. Man City's £227 million. Despite Man City's nearly decade of success on the field compared to Man United, MANU still has more brand power as exhibited in commercial sales.

Conclusion

Manchester City has been on a great run as a soccer team on the field, which has dramatically increased its value as a company. That said, I am uncertain that Manchester United's extreme valuation discount to Manchester City is warranted. If Manchester United can right its organization and recreate a winning culture to match its past success, the current $3 billion valuation may look like a steal some day.

This article was written by

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Long-term focus, with some exceptions. Self-taught investor. I started investing my own money in 2010 and have outperformed the S&P 500 in the years since.
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Disclosure: I am/we are long MANU. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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