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The following segment was excerpted from this fund letter.
The Manchester United (NYSE:MANU) investment thesis
The Reds are the ONLY way to participate in the riches of the English Premier League, which we have discussed, emanate from broadcasters, sponsorship, merchandising and European success. But to do so means you HAVE to enter a value trap, because MANU is controlled by the Glazer family. It is clear they see MANU as a (lucrative) financial asset and have done relatively little – apart from pay excessive transfer fees for the wrong players and appoint the wrong managers since Sir Alex Ferguson retired – to satiate the desires of the hardcore MANU fan.
Against this backdrop, and with eyes wide open, we have a small position in MANU, since the upside on a sale is significant. The probability of a sale, from every angle, is increasing. This is an asset not immune from, but less impacted by global events for reasons discussed previously.
To be “stuck” in MANU shares is unlikely to be a good investment. MANU were floated seven years ago (August 2015) at US$14 per share – not far off the price today. There have been no stock splits, but the Glazer Family, which started with 124 million “B” shares (10 votes) out of 164 million total shares, have watered this down to 110 million through sales (B shares revert to “A” shares on sale). The shares peaked in June 2018 at $27 and recently touched a low just below $11.
As other clubs are now being acquired by far larger entities than was previously the case – viz the Noisy Neighbours and Newcastle – even the wealthy Glazers are starting to rethink the logic of controlling MANU. In our opinion, the process of divesting their controlling stake has begun, because we are probably getting close to peak mania, and they can take an egregious amount of money off the table. Anyone buying MANU would on our thesis require full 100% control of cash flow, not just equity.
The most rumored buyer is Jim Ratcliffe Britain’s richest man and chair of Ineos, the specialty chemical (mainly ethylene) company. Certainly, another potentate would not want to leave stock with pesky individual investors.
So, what’s United worth? Basically, what the Glazers will sell it for. We don’t usually get our financial news from the (UK) “Daily Mirror” (formerly owned by the “Bouncing Czech”) but the morning edition of 5 September 2022, suggested “The Glazer family have slapped a minimum £3.75 billion price tag on Manchester United amid increasing pressure to sell the club”.
To gain an idea on the issues with football club accounting, whilst the Glazers have loaded MANU with £492 million of net debt, the balance sheet at end June 2022 also has £147 million of “deferred revenue” – effectively sponsorships and corporate and season tickets for which the “service” has not yet been provided, along with a net £274 million of trade creditors and payable. All up, £913 million of liabilities.
Taking a conservative view of the “Daily Mirror” price leak, excluding these liabilities suggests an equity price of around £2.85 billion or US$19.50 a share – subject to FX rates – versus the current level of $13.27.
Is the price realistic? Somewhat surprisingly, probably yes. The Silver Lake investment into City Football Group valuing it at $5 billion (£4.4 billion) is a reasonable lead, as is the equity value purchase of Chelsea in mid-2022 by the Todd Boehly consortium of £2.5 billion plus required investment of £1.75 billion in “infrastructure” mandated by UK Government, given the selling shareholder was Roman Abramovitch.
An equity value of £2.85 billion equates to 4.9x revenues in the latest season of 2021-2022 (6.5x including debt) which is below the average noted for NBA teams.
At the current share price, MANU trades at 26.6x guided EBITDA for FY23 (ends June). However, the key to the business’ sustainability is cash flow. MANU generated gross cash from operations of £122 million in FY22, down £16m on the prior year; but the Glazer’s gearing means >£20m of that went in interest payments. So operating cash flow after interest was £101 million.
But the lousy on-pitch performances and past transfer market debacles resulting in a further need to strengthen the team, saw United spend a net £80m on new players in FY22. With another £8 million on “plant”, free cash flow was a lousy £9m pre-tax. But the Glazers need money – so they borrowed £40 million to pay £33m in dividends, of which they received £22 million.
It is clear, on a financial analysis, and an emotional one, that this clown show should be getting closer to its end game. The Glazers can’t keep financially levering up United, especially if they don’t qualify for the ECL. Whilst the Glazers may lose the “kudos” of controlling arguably the most famous football club in the world, effectively they have no “kudos” because the fan base generally despises them. In the current times, there are potential buyers aplenty for EPL assets – with reason because of TV, merch and “franchise” growth – and this is the jewel in the crown.
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Disclaimer While East 72 Holdings Limited (E72) believes the information contained in this communication is based on reliable information, no warranty is given as to its accuracy and persons relying on this information do so at their own risk. E72 and its related companies, their officers, employees, representatives and agents expressly advise that they shall not be liable in any way whatsoever for loss or damage, whether direct, indirect, consequential or otherwise arising out of or in connection with the contents of an/or any omissions from this report except where a liability is made non-excludable by legislation. Any projections contained in this communication are estimates only. Such projections are subject to market influences and contingent upon matters outside the control of E72 and therefore may not be realised in the future. This update is for general information purposes; it does not purport to provide recommendations or advice or opinions in relation to specific investments or securities. It has been prepared without taking account of any person’s objectives, financial situation or needs and because of that, any person should take relevant advice before acting on the commentary. The update is being supplied for information purposes only and not for any other purpose. The update and information contained in it do not constitute a prospectus and do not form part of any offer of, or invitation to apply for securities in any jurisdiction. The information contained in this update is current as at 30 September 2022 or such other dates which are stipulated herein. All statements are based on E72’s best information as at 30 September 2022. This presentation may include forward-looking statements regarding future events. All forward-looking statements are based on the beliefs of E72 management and reflect their current views with respect to future events. These views are subject to various risks, uncertainties and assumptions which may or may not eventuate. E72 makes no representation nor gives any assurance that these statements will prove to be accurate as future circumstances or events may differ from those which have been anticipated by the Company. |
Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.
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