Man Utd – Great club but terrible investment

Following the ongoing rumours of Manchester United going public, last week the club finally filed for its Initial Public Offering (IPO) on the New York Stock Exchange (NYSE). Initial rumours said the club was aiming for about USD 1 bn to reduce its debt. However, the club actually targeted USD 100 m. It has not however disclosed how many shares it will sell to the public in order to raise the 100 m, but I will follow up on that as soon as those details are released. With other details regarding the IPO also yet to be published, let us look at the club’s financial performance for the last three years as highlighted in its filing.

Revenue growth
A football club’s revenue growth is heavily dependent on its overall performance on the pitch. The largest growth potential in Man Utd’s revenues is within its commercial segment, where the club is able to leverage on its massive brand just like it has been doing in Asia for the past few years. This segment has been the main source of revenue growth for the club. 

Matchday revenues are highly correlated to the number of games played by the team, which is basically how well the team performs within European and domestic competitions besides the Champions League. This revenue segment is however partly capped to stadium capacity and the maximum length of football season.

Broadcasting revenues are derived from global television rights that the club participates in. As the broadcasting deal for the coming three English football seasons rose 70 percent in value earlier this year, Manchester United will surely see growth in this revenue segment during the coming years.

As can be seen from chart 1 revenue growth in 2011 was good, at 15.7 percent after a low of 2.9 percent the year before. For the nine months ending in March 2012, Manchester United has managed to grow its revenue by 6 percent compared to the previous year, where commercial revenue grew 16.8 percent y-o-y.

All in all, past revenue growth has been okay within most segments, especially in the commercial segment. However, all revenue streams reflect the overall performance of the club and could take a hit with only one bad season of failing to qualify for the Champions League. As the English premiership has become more competitive during the last couple of years, with Man Utd’s main rivals in Man City snatching the title last year, the unthinkable might happen where Man Utd fails to qualify for major European competitions.

Profits
So, with revenue growth not looking so bad, let us turn to the club’s profits. Total operating profits (EBIT) of a football club include revenues minus operating expenses plus profit from selling players. Despite selling players being a part of football’s business model, I think it is important to separate the two numbers in order to have the overall picture, since selling all players is not a sustainable revenue stream.

While revenues grew by 2.9 and 15.7 percent in 2010 and 2011 respectively, total operating profit (EBIT) has fallen slightly. Excluding proceeds from player sales in 2009 – 2011, we see that EBIT grew by 17.5 percent and 15.4 percent in 2010 and 2011 respectively. Looking at total EBIT (including player sales) we see a decline of 47.9 percent and 1.6 percent in 2010 and 2011 respectively. The GBP 80 m boost in profits in 2009 comes from the sales gain from only one player, Cristiano Ronaldo.

It is therefore clear then that the main reason why Man Utd is opting for this IPO is to reduce its debt. As we can see from chart 3, interest expenses have heavily affected the club’s bottom-line financial performance.

In 2009, 2010 and 2011 the club paid GBP 188 m, 110 m and 53 m respectively in interest on its debt! These enourmous values have kept Man Utd from signing expensive players like its neighbours in City.

Reported profit for 2012 looks very good, but don’t be fooled by the large jump! On the surface the main reason for this nice looking profit increase is due to GBP 22.5 m in tax credit. This is not something that is likely to occur every year, so going forward investors should expect profit to be closer to the 2011 levels.

What is also noteworthy is the club’s profit in 2009. Despite selling Cristiano Ronaldo for a massive GBP 80 m (highest value ever paid for a football player), that amount did not even cover the interest incurred on the club’s debt (GBP 118 m). If the club had not sold its most valuable player its loss would have been much larger than the one incurred in 2010. The question is: would Man Utd have sold Ronaldo if it had had less debt on its balance sheet in 2009? Perhaps not.

Conclusion
Overall the club is loaded with debt, and its owners are now looking to investors to help them reduce this. The club’s operating cash flow was negative in 2011 and is negative for the nine months ending March 2012. The club’s future revenue growth is heavily dependent on its commercial segment. Other segments, matchday and broadcasting, are affected by forces outside the club’s mandate and can therefore not be boosted by the club’s own initiatives. In modern football, clubs are usually not meant to make significant profit – proceeds are to be spent on strengthening the squad with new signings. Furthermore, it is clearly stated in the club’s IPO filing that it does not plan to pay out any dividends to its new shareholders in the foreseeable future.

So, what Man Utd investors get is a highly leveraged football club with two consecutive years of negative cash flow, one major controlling shareholder who calls the shots, and revenue streams that can be heavily hurt by poor pitch performance in a single year. You either love or hate football stocks, but either way they are probably a terrible investment.

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For an overview of the historical performance of football stocks, see my previous theme.