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Back in June, I rated the Manchester United plc (NYSE:MANU)a buy on account of the possibility of a takeover offer. Since then, the stock trades around 20 percent lower. That does not take into account that, in the meantime, a tender offer was indeed made – just not for all outstanding shares. In this article, I will take a look at recent developments and explain why I exited my position in the English Premier League’s record champion. Kindly note that following “football” refers to the sport American readers may know under the name “soccer”.
What Happened Since
Turns out, my preferred takeover option – an all cash acquisition by a Qatari consortium led by Sheikh Jassim bin Hamad al Thani – did not come to pass. Instead, Ineos plc founder Sir James Ratcliffe, through Trawlers Ltd, acquired around a quarter of the club’s equity, equally split among Class A and Class B common stock at a price of $33 per share, and injected another $300 million. That was obviously not as good as a full takeover, but better than no deal. I, for one, gladly tendered a quarter of my stake.
The sporting season so far is pretty disappointing, with a catastrophic (non-)performance in the UEFA Champions League and a spotty record in the Premier League. At least a strong run in the FA Cup is a bright spot (at the time of writing, Manchester United have reached the semi-final – playing underdog Coventry City on April 21st – after a last minute victory against arch-rival Liverpool). Off the pitch, Manchester United has been more successful. First of all, Qualcomm Inc. (QCOM) will replace TeamViewer SE (OTCPK:TMVWF;OTCPK:TMVWY) as front of shirt sponsor from next season, reportedly paying an annual fee in excess of GPB60 million. That represents a significant increase over the current deal estimated at GPB47 million per annum. Furthermore, the contract with kit supplier adidas AG (OTCQX:ADDDF;OTCQX:ADDYY) has been renewed for a further decade at a guaranteed value GPB90 million per season. The former two deals are the big fish, but there are also some smaller deals. Notable new commercial partnerships include Malaysia Airlines becoming the club’s “official commercial airline” and Estee Lauder (EL) henceforth being the “official skincare partner” – a position that has not existed before (and, quite frankly, as a football fan I am not entirely sure should exist – but hey, with my investor hat on, I am not complaining about revenue increases).
There is also a change of operational leadership change, with the company poaching Omar Berrada from cross town rivals Manchester City. His appointment may help improve sporting performance over time through better and more efficient player transfers. More importantly, he has a reputation as a tough negotiator, who seldom overpays. Given Manchester United’s propensity to massively overpay for new signings under the leadership of former CEO Richard Arnold and his predecessor Ed Woodward, this is certainly good news.
What Is to Come
Recent developments bode well on the revenue side, at least as long as the sporting performance picks back up enough to at least secure Champions League participation on a consistent basis. However, revenue is only one side of the medal. The other side is costs. And that is where the whole affair gets less pleasant. Following years of neglect, Old Trafford needs some work done. Well in excess of $1 billion’s worth of work (by conservative estimations) to be precise. Also, transfer fees are not exactly trending down. And as any follower of Premier League football this year will tell you, Manchester United definitely needs to strengthen its roster in order to get sporting performance back to a level on par with the best teams in England, let alone Europe.
Most of the aforementioned sponsoring contracts will be effective from next season. This year, the abysmal Champions League performance will also have affected revenues in a negative way. Even a possible FA Cup victory would not net that out entirely. Hence, I would not be surprised to see net losses pick up considerably in FY2024 (ending June 30th, in line with the sporting season rather than the calendar year), following GPB28.67 million (or 17.6 pence per share) in FY2023. From 2025, there will be a further revenue boost due to the Premier League’s new media rights deal, which has an annual value of about 10 percent above the current deal with the system of revenue sharing between the individual teams largely remaining the same. However, a return to profitability is not guaranteed and subject to sporting performance. In any case, I believe dividend distributions or share buybacks to be highly unlikely for years to come.
On a side note, unlike what I had initially expected, the transaction was funded without debt (or at least no debt at the level of Trawlers Ltd.). While fans still reeling from the late Malcolm Glazer’s 2005 leveraged buyout presumably did breathe a sigh of relief at this, it also means that there is less of a motivation for Sir James to extract maximum economic value from Manchester United. On the contrary, I could in deed imagine the signing of costly new star players during Sir James’ first transfer window as a co-owner. That kind of “gift to the fans” is not unheard of in European football, quite the opposite in fact.
Acquisition Unlikely
For the time being, I believe that an acquisition/privatization of Manchester United has become rather unlikely. Had Sir James desired to acquire a larger portion of non-Glazer owned equity at $33 per share, he would surely have done so. The tender offer was likely motivated by board concerns regarding the fair and equal treatment of minority shareholders. If only the Glazers were given an opportunity to cash in, lawsuits would have been all but certain. Obviously, no shareholder would sue over being given the ability to sell a higher percentage of their stake at a massive premium. One should also bear in mind that, at least in theory, Sir James/Trawlers could buy Class A shares on the market at considerably lower prices. In practice, this would probably lead to a surge in prices once it became publicly known – which it would, courtesy of SEC mandated disclosure. It should further be taken into account that in the case of Manchester United, there are no mandatory takeover offers once a certain ownership threshold is met.
The possibility of a third party acquisition, too, has become far less realistic now that in addition to the (often indecisive) Glazer sibling’s there is another anchor shareholder in Sir James. If he was just looking to flip the club at the next best opportunity, subject to Glazer willingness to sell, it does not really make sense to go about it in the way he did. He could have simply acquired Class A shares at the open market far below the $33 price he ended up paying. The Glazers, on the other hand, could theoretically force a sale of the company within 18 month from the closure of the transaction with Sir James being obliged to sell at the same conditions (subject to a right of first refusal – which, obviously, would not make a difference to other shareholders, money is money). However, I believe that they are probably not all that motivated to sell, otherwise they would have presumably done so this time around. On the other hand, buyers evidently are not keen to buy at the Glazers fantasy prices. Presently, I do not see why the Qatari consortium, let alone any other party that did not participate in the first round of bidding, should up their previous offers. I will, however, caution that when it comes to trophy assets, there is always the possibility of sudden change of mind. The story of Point72’s Steven Cohen and his Picasso comes to mind. If you are not familiar with this story, I highly recommend Sheelah Kolhatkar’s Black Edge, which tells it and many others – but I digress.
Conclusion
Sports teams are trophy assets and should be valued as such. (European) football clubs even more so than other teams/franchises. Manchester United is no different in this regard, quite the contrary indeed. Revenues are only somewhat predictable, and profits are hardly predictable at all due to the transfer system and the Champions League payments. Calculating a forward PE multiple is quite impossible, if one day before the end of any given fiscal year there may be a surprise transfer for a fee of easily $100 million or more.
In the case of Manchester United in particular, there is also the fact that important sponsoring and kit deals have just been renewed, while the new media rights deal in both the Premier League and the European club competitions will come into effect next season. This means that explosive revenue growth (outside of outgoing transfers, which are inherently unpredictable) is not to be expected beyond FY2025.
As a business, the company is not exactly valued cheaply at around 3 times revenue based on the higher end of FY2024 guidance (GPB665 million = around $840 million at current Sterling exchange rates) given hardly predictable profitability with a significant probability of net losses for the foreseeable future. On the other hand, for a trophy asset that just months ago a buyer was willing to assign a value more than twice as high as what the current market price implies to it is not exactly expansive at just below $15 per share.
Absent renewed interest in a privatization offer for Class A shareholders, I do expect the stock price to largely move sideways for the foreseeable future, probably roughly somewhere between $13 and $16. Personally, I sold my remaining shares, which I had acquired slightly above the 17 mark, for around $14.6 per share (at current exchange rates, I sold via a Euro-denominated trade gate, not NYSE). Hence, it may sound counterintuitive that I am rating it as a hold, not a sell. If you have another few seconds to spare, I will gladly explain my reasoning. In and off itself, I believe that there is neither outsized downside risk nor obvious immediate upside potential. Within the context of my portfolio, however, I have identified other targets to invest in. There are also tax considerations which made it opportune for me to realize a paper loss at this time.
