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A Look at Manchester United

Manchester United PLC (NYSE:MANU) is one of the premier sports franchises in the world, with a storied history dating back to 1878. It has long been a contender in one of the top European leagues of the world's most popular sport (football, or what us pesky Americans still call soccer). With hundreds of millions of fans, Man U is the most followed club in the world.

Let's start with some history: in 2005, the Glazer family (which also owns an NFL team) disclosed they had become majority owners of the club after acquiring the 29% stake previously held by two Irish horse-racing tycoons (that transaction brought their total ownership to nearly 60%). As noted in a well-written ESPN article about the deal, the valuation for the club was 790 million pounds ($971.18 million) - with the vast majority of the purchase funded with debt (up until that point, the club had been debt-free). When Malcolm Glazer died in 2014, his ownership was disbursed among his six descendants. And while the family collectively owns just 7.4% of the publicly traded Class A shares, they essentially have complete control of the club through their 100% ownership of the Class B shares. (The company went public in August 2012 at an initial offering price of $14 per share.)


Revenues have roughly doubled over the past decade (using the midpoint of management's fiscal 2020 guidance), which primarily reflects the impact of more valuable television broadcast rights (both domestically and internationally) and commercial arrangements. The most recent rights deals, for the three year cycle covering 2017 to 2019, came with a roughly 60% increase in annual broadcast value for teams in the English Premier League. As shown below, broadcast revenues per match for Manchester United in 2019 were roughly 4.5 million pounds (with total revenues per match up nearly 50% over the past five years to 12 million pounds).

But while revenues have increased at a decent clip, this has not translated to profitability. The reason why this has happened is because an increasing share of the company's revenues have been allocated to employee costs - investing in first team talent. The net result has been a significant increase in employee costs as a percentage of revenues over the past 10 years (with employee costs up 12% last year).

This result is a bit curious considering that the UEFA Financial Fair Play rules - most notably the break-even requirement that has been in force for the past five years - should've presumably led to an improvement in employee costs. No matter the reason, the reality is that the costs associated with fielding a best-in-class team have never been higher. If Manchester United wants to be competitive in the EPL and have a shot at making noise in the Champions League (which has meaningful financial implications for the club), it has to be willing to continue spending higher and higher sums on players like Paul Pogba, David de Gea and Harry Maguire. (For what it's worth, Man U has won the Preimer League 13 times since 1992.)

As a result, operating income for the club in 2020 is unlikely to be much higher than it was five or 10 years ago. (It's worthwhile to note here that management's presentation of Ebitda as a financial metric, considering how the cost of players flows through amortization expense in the income statement, is nonsensical.) The company pays a small dividend, but it doesn't have the financial capacity to do much else. As noted earlier, the club went public back in 2012 at a price of $14 per share. Seven years later, the stock has appreciated by less than 20% (to $16 per share).

Conclusion

It's not difficult to appreciate why high-profile sports teams are valuable. Their ownership comes with fame and recognition that is attractive to (predominantly) rich old guys. It seems reasonable to assume these unique assets will continue to appreciate in value in the decades to come.

But that doesn't change the fact the valuation is not supported by the financial results. At the end of the day, Manchester United - with a market cap of $2.7 billion - trades at something like 50 times operating income. There's no case for the stock here based on the cash generation of the business; said differently, this all comes down to the terminal value of the club if it's sold. For that reason, this is, at best, intelligent speculation - not an investment. And while that might work well if the Glazers (eventually) decide to sell the club, it's not something that appeals to me as an investor.

Disclosure: None.



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This article first appeared on GuruFocus.