Manchester United Stock: Big Gains If A Sale Is Agreed (NYSE:MANU)

Company description:

Manchester United (NYSE:MANU) is a football club based in Manchester, England. It is one of the most successful football clubs in the world, having won numerous titles and accolades throughout its history, including 3 European Championships, the highest Club accolade in the sport.

The company generates revenue through the following channels:

• Marketing and sponsorships
• Clothing and merchandise sales
• Distribution and TV rights
• Matchday tickets.

Manchester United (United) is owned by the Glazer family, who hold 90% of the shares. 10% of United’s shares are listed, which is what investors are able to access.

Investment thesis:

United has recently become a hot topic in the media due to the Glazer family announcing their intention to sell the team and the rumour mill abuzz of who the purchaser will be. The announcement has caused the stock price spike, as investors attempt to estimate the eventual purchase price.

In our analysis, we aim to determine the value of Manchester United and the amount an investor should be willing to pay for it. A crucial part of this assessment involves an analysis of the Premier League and English football as a whole, which sets the context for why investors have been paying large sums of money for British clubs. We will only touch briefly on Manchester United’s financials relative to this, as in the world of English football, money is no object.

The beautiful game:

Modern day football was created in 1863 in England and has been a core of British culture for much of the time since.

Football in Britain has always been see as more than just a game – it’s a way of life for working class communities. The sport is very much a part of the cultural fabric of the country.

In recent years, British football has seen a rise in cultural prominence globally, with the English Premier League being one of the most watched and followed leagues in the world. The league has managed to attract the best players from around the world, making it one of the most competitive and entertaining leagues in the world. This has been accompanied by a growing gap between the Premier League and other leagues financially. This has led to concerns about the competitiveness and healthy of other leagues, as the majority of top players, teams and thus money, move to England. For example, Julen Lopetegui managed Real Madrid (Statistically the greatest football club) in 2018 and recently took over Wolves, when they were bottom of the Premier League. Keylor Navas, a multiple Champions League winner with Real Madrid, recently joined Nottingham Forest, a team people thought would be relegated from the Premier League (bottom 3 teams).

Media development in Football:

An area that United have been investing heavily into is social media and their online presence. Clubs have been doing this in order to reach a global audience, increasing their brand exposure and thus fan base, in order to increase their revenue potential. Clubs have also been using digital technology, such as data analytics, to improve their fan engagement through personalized content.

One of the main factors that has fueled interest in English football outside the UK is the advantage of the English language, which allows teams to establish a closer relationship with foreign fans, exporting the English passion for football.

Looking directly at the combined number of social media followers, we observe 5 of the top 10 teams being English, with United in 3rd place.

The high valuation of social media companies, in the hundreds of billions, is attributed to the value placed on consumer data and interest. Given the substantial social media presence of English football, we anticipate that this will drive further growth for the Premier League compared to other leagues, as the younger generation are further engulfed in social media.

Premier League rights:

The interest in football domestically and from abroad has driven demand for live football content globally, driving the broadcasting industry. This has resulted in increased competition among broadcasters to secure the rights to show live games, which has contributed to higher revenue for the clubs.

The Premier League is significantly larger than every other league, and its growth rate is so fast that it is not out of the question that the league is double the size of the next closest in the future.

Super league:

The announcement of the Football Super League was a monumental moment in the world of football. The proposal aimed to create a closed league of some of the biggest and most successful clubs in Europe. This would almost certainly guarantee financial success for the teams beyond anything they would make in the current format. For those who do not follow the sport, imagine if the largest U.S. states decided to leave the USA and join Canada, the UK, France, and Germany in a new Union.

However, the proposal was met with widespread opposition from fans, players, and governing bodies, who saw it as a threat to the integrity and tradition of the sport. The UK Government came out on the side of the fans, threatening strong legislation to stop anything of this nature occurring in the future. They are currently drawing up plans for an independent regulator.

The backlash against the Super League was impressive, with fans staging protests outside stadiums and taking to social media to criticise the joining clubs. The passion and commitment of fans to their clubs and the sport as a whole was made clear, and in a rare case, their protests were successful. Within a couple of days, several of the British clubs involved in the proposed Super League backed out, and the plans were eventually abandoned.

Struggling European teams such as Juventus have attempted to keep the Super League dream alive, but without the English teams who were the first to withdraw, the plans are dead.

This does offer scope for future growth, as many wealthy football club owners look to find a way of creating such a system that does not immediately fail. Our view is that this will come as an innovation of the current Champions League. Some have suggested that the Premier League will become this Super League on its own.

Boehly Ball:

Todd Boehly, an American investor, purchased Chelsea Football Club from Roman Abramovich (Russian Oligarch ordered to sell the club) in 2023 for £4.25BN. Boehly acquired the club with the intention of investing heavily in order to accelerate its on field success, before transitioning towards a sustainable model. Since taking over the club, Boehly has lived up to his vision, investing heavily in the team’s infrastructure, players (£554M in less than a year), and coaching staff. Todd is not representing a Government agency looking to sportswash his country, he is a shrewd businessman looking to make a profit.

Chelsea is a historically important British team but does not have anywhere near the success of United. Further, they do not own their stadium, which is held by the fans. Thus, there is a value delta between the two teams, but we will seek to quantify this later in this paper in order to value United.

Green and Gold, till the club is sold:

Manchester United fans have been protesting the ownership of the Glazers since they purchased the team via a controversial leveraged buyout.

The primary grievances of the anti-Glazer movement are centered around the believed mismanagement of the club, including a perceived lack of investment in players and infrastructure, high ticket prices, significant additional debt and a disregard for the club’s heritage / traditions. The movement has resulted in over a decade of protests in person and on social media.

It is important to note that the potential sale of the club is not guaranteed, as the Glazers have long held tight control over Manchester United, viewing it as a source of steady revenue. Some sources suggest that their decision to sell may be due to financial obligations for both the team and themselves. However, given the widespread discontent towards the Glazers among fans and stakeholders, it is likely that the club will eventually be sold, even if it is not now. Therefore, those speculating on the purchase should appreciate that the shares may need to be held for an extended period of time.

On the pitch success:

The financial performance of United is influenced by its sporting success. The club’s success on the pitch, including its performance in the Premier League and other competitions, can impact its revenue and brand value. United has not won a league title in over 10 years, with their last trophy in the 16/17 season. This has impacted the commercial value of the team, with United falling from 1st to 4th in Deloitte’s Football Money League.

While the strong football culture in England ensures that the stadium will be well attended regardless of the team’s performance, marketing departments of corporations are less driven by passion. This could contribute to slowing growth long-term, if United continue to fall behind.

Financial performance:

The financial situation of Manchester United explains the discontent among the fans towards the ownership.

Despite a period of underwhelming football results, the club has still managed to grow its revenue at an impressive rate of 6% per year, which excludes Champions League fees in many of the periods. This said, the recent decline in revenue growth is likely due to the team’s subpar performance affecting its commercial value. As the below shows, Sponsorship revenue has declined.

The club has been steadily incurring losses, largely due to the acquisition of underperforming players on expensive contracts.

The club’s cash balance has decreased to unprecedented lows, with only £24 million left. Without a new owner, the club might have to raise more debt or face further underperformance, as its FCF may not be sufficient to cover both expenses and the upcoming transfer window. Unlike every other owner in the English top-flight, the Glazers have net taken money out of United, making owner funding unlikely (WBA and Burnley are not in the Premier League and Newcastle were taken over by the Saudi’s, who have now injected money).

Valuation:

To estimate the value of United, we have performed a back-of-the-napkin calculation using the sale of Chelsea as a comp. We cannot guess if someone will overpay for the club, which happens regularly in football, but we can estimate United is worth. The football industry is unique in that many affluent investors, some of which are Government-linked, are willing to incur substantial losses in pursuit of future gains, while keeping the clubs private. This makes it difficult to conduct a comps / DCF valuation.

As shown above, our calculation arrives at a valuation of £4.5 billion. We will go through each step of the calculation.

1. Chelsea valuation – This will be the basis for our valuation, as it was conducted as part of a Government supervised auction.
2. Old Trafford valuation – Unlike Chelsea, the buyer of United would obtain the valuable asset of Old Trafford, located in a prime location in Manchester. We have estimated the stadium’s value based on recent real estate transactions in the area.
3. Performance superiority – Chelsea required millions of dollars from Roman A. to remain financially stable. On the other hand, Manu is self-sufficient, which increases its value. Therefore, we have applied a 1.5x revenue value uplift to United. This is similar to a profitable company being worth more than a loss-making one, other things being equal.
4. Manu success value – United boasts 42 trophies compared to Chelsea’s 25, which reflects its popularity and standing in the sports world. This popularity attracts fans and carries a value as new fans tend to gravitate towards historically successful teams.
5. Old Trafford capacity – With its larger size, OT generates greater revenue than Stamford Bridge. We attribute value based on stadium size difference and a 3x multiple reflecting a conservative view of matchday economics.
6. Old Trafford Capex – As a fan of United and regular attendee of OT, I can say firsthand the stadium is in dire need of a complete overhaul, with some estimates placing the cost of the rebuild at £1.5BN, exceeding the cost of building Tottenham’s cutting-edge stadium.
7. Net debt – Assumed CFDF transaction.
8. Carrington Reno – Like its stadium, United’s training facility also requires a complete renovation or replacement.
9. Squad difference – According to Transfermarkt, Manu’s current squad is worth £66M more than Chelsea’s at the time of purchase.
10. Chelsea’s restrictions – To secure Chelsea’s future from owners similar to the Glazers, Roman A. placed strict capital restrictions, such as a ban on drawing money for 10 years. The new owner of United will not be subject to such restrictions and can therefore extract greater value.
11. Other – There are other factors that may impact the valuation, such as the potential to change the name of the stadium, which Chelsea cannot do. Manchester United, with its commercial might, may be able to secure a similar deal to Barcelona’s £236M agreement with Spotify to rename its stadium for 4 years, which would bring in additional profit with minimal associated costs. If valued on a 15x multiple, it suggests further value of £885M. The reason we have not included this as a separate point is because attempting to rename Old Trafford would likely cause riots in the streets of Manchester.

With a current market cap of c.£3.15BN, Manu presents an investment opportunity with a potential upside of 43%.

The Glazers are reportedly seeking $5BN-$6BN, which following negotiation is in the ballpark of our valuation. Sir Jim Ratcliffe, the UK’s richest man, and Qatari investors are said to be interested in the club. The new owner is expected to acquire all shares and delist the stock. Overall, United is seen as a promising investment opportunity for those willing to speculate on a deal.

Conclusion:

As a lifelong fan of the club, it is with great excitement that I can write about its potential sale. The truth is, under the ownership of the Glazers, the club is unlikely to compete with the likes of Todd Boehly’s Chelsea and Abu Dhabi’s Man City. The premise of this analysis is dependent on the probability of a sale actually taking place. In my opinion, if the right offer of around $5BN is made, the Glazers will consider selling. In the past, whenever rumors of a sale have surfaced, the family has promptly dismissed them. However, this time feels different.