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Manchester United: the best football investment ever?

Manchester United: the best football investment ever?

Richard Branson once said that the easiest way to become a millionaire is to start off a billionaire and then go into the airline business. The same could often be said of owning football clubs, with several super-wealthy wannabe chairmen having been burnt along the way.

But not all football investments have gone the way of Leeds United or Portsmouth for their backers.

Investors who bought Manchester United stock at its partial flotation last August are now sitting on a healthy 23.79% profit.

The IPO was much derided at the time, not least for its structure. The owners, the Glazer family, released just 10% of the company’s equity and their retained shares each carry 10 times the voting power of each publicly traded stock.

Concerns around this and the valuation of United saw the targeted float price of $18 slashed back to $14 and the offer was so unattractive to some that upon flotation, around 8% of the company’s shares were out on loan as the short-sellers circled.

Initial scepticism

Initially the naysayers’ scepticism looked well placed as the shares immediately headed south, down to around $12. But rather than sending investors running, it soon emerged that legendary investor George Soros had bought an 8% stake in the publicly traded stock, equating to 1.9% of the entire club.

‘At the beginning everyone said how expensive it looked, but the purchase by George Soros was interesting and lent support to the stock,’ says Roy Kaitcer, a divisional director in Brewin Dolphin’s Manchester office.

But even the most ardent fan would not have expected the parabolic share price uplift seen in the fourth quarter as the market moved firmly into risk-on mode.

Fund management giant BlackRock also took an 8% stake of the free float in January and the club’s excellent performance on the pitch – it is 12 points clear at the top of the Premier League and going strong in the Uefa Champions League and FA Cup – have been matched on the commercial side.

In its latest update earlier this month, United reported a 47.9% rise in pre-tax profits in the fourth quarter (the club’s second fiscal quarter), while commercial revenues rose by 29% over the same period.

The three times European champions completed six new sponsorship deals, increasing its footprint across Asia, and also announced it had signed an eight-year sponsorship deal with a new training kit partner after buying out DHL from its previous arrangement.

Pre-tax profits rose from £19.2 million to £28.4 million year-on-year, despite staff costs rising by 14.2% to £44.2 million over the same timeframe.

Commercial revenue hit £35.6 million, up from £27.6 million, but broadcasting revenue remained the biggest source of income, up 4.8% to £39.5 million over the three months, contributing to total revenue growth of 8.7% from £101.3 million to £110.1 million.

The club expects revenue for fiscal 2013 to come in between £350 million and £360 million, up from £310 million year-on-year.

Some £62.6 million of the flotation proceeds were used to buy back senior secured notes reducing the company’s net finance costs by 25.2% to £9.2 million. Gross debt has fallen by 16.1% to £366.6 million from £438.9 million at the end of June.

Although last week saw the announcement that long-standing chief executive David Gill is to retire in June to be replaced by current executive vice chairman Ed Woodward, Gill will stay with the club as a director to ensure continuity.

So with the club proving a powerhouse both on and off the pitch this season, is it worth a punt or has the easy money been made?

‘It trades on a 12x Ebitda, which looks pretty punchy to me,’ says Simon Reeks, head of private client investment management at Midas Investment Management.

‘The real risk to the upside is that they start selling a lot more regional sector licences to advertise, such as regional licences in China, that would then justify the premium valuation.’

Kaitcer similarly praises the club’s commercial strategy of breaking down licensing and merchandising agreements by individual country rather than region to maximise returns, but believes that realistically it can only ever be seen as a punt.

‘It has a fantastic brand name, but it’s not cheap,’ he says. ‘I have been surprised at how well it has done but think it is more for institutions or diehard fans.’ 

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