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Manchester United is up for sale

The board of Man United (MANU) announced it would explore strategic alternatives on Tuesday:

As part of this process, the Board will consider all strategic alternatives, including new investment into the club, a sale, or other transactions involving the Company. This will include an assessment of several initiatives to strengthen the club, including stadium and infrastructure redevelopment, and expansion of the club’s commercial operations on a global scale

So let’s review how one of the most iconic sports teams in the world makes money.

The Red Devils are one of the world’s most popular sports clubs:

• The most popular Premier League club on social media (170 million+ followers).

• 20 Football League/Premier League titles

• 3 European Cup/UEFA Champion’s League titles

• 12 FA Cup wins.

The club’s ownership is a controversial topic

Here’s the one-minute story:

• 2005: Malcolm Glazer, an American businessman, purchased a 29% stake, gaining controlling interest. It was a highly leveraged investment valuing the club at £800 million ($1.5 billion at the time).

• 2006: Two of his children, Joel and Avram, started running the day-to-day operations.

• 2012: The company launched its IPO on the New York Stock Exchange at a $2.3 billion valuation.

• 2014: Malcolm Glazer died, and the controlling stake was split equally between his six children.

• 2021: Avram Glazer put £70 million ($97 million) worth of his shares up for sale.

• 2022: The club has a net debt of more than £400 million. The Glazer family has faced fierce opposition from supporters for saddling the club with debt.

At the end of FY22, the six descendants of Malcolm Glazer collectively represented 67% of the voting power of all shareholders through a concentration of voting power in the “Class B” shares.

So why are they selling now?

• Old Trafford is the Premier League's biggest stadium. However, the facilities have fallen behind other teams in the league. The Glazers need at least £200 million to upgrade the stadium.

• Man United’s last trophy was the 2017 Europa League. The lack of success started showing in the revenue of the club.

• The club is still making less revenue than in 2019 after two years impacted by the global pandemic.

• The team spent a record £220 million this summer to sign new players.

• The Raine Group is the financial advisor in the deal. The American bank had recently gathered interest in the sale of Chelsea FC and likely has dozens of potential investors lined up.

What’s the price tag?

Forbes recently published a list of the world’s 50 most valuable sports teams.

The English Premier League is one of the best-represented leagues after the American leagues (NFL, NBA, MLB).

The top European football teams in the ranking were:

• Real Madrid: #13 at $5.1 billion.

• Barcelona: #15 at $5.0 billion.

• Manchester United: #19 at $4.6 billion.

Since Tuesday’s announcement, MANU (the stock) is up almost 60%, leading to an enterprise value in line with the Forbes ranking. But chances are, a potential buyer would have to pay a premium.

How does Manchester United make money?

Here is a bird’s eye view of the FY22 income statement (ending in June 2022).

• There are three main revenue segments:

  • 👕 Commercial (~44% of overall revenue).

    • Sponsorship (~25% of overall revenue).

    • Retail, merchandising, apparel & product licensing (~19% of overall revenue). Unlike teams in American leagues, Man Utd retains full control of the monetization in the retail category. The company has a 10-year agreement with Adidas that began in 2015.

  • 📺 Broadcasting (~37% of overall revenue).

    • Central Media (Premier League and UEFA media rights). In the European Leagues, clubs get bonuses based on how far they go in the competition. The Champion’s League is well above all other competitions, rewarding more than €10 million for each knock-out round participation.

    • Digital media (company website and apps, localized content, on-demand video, social media, MUTV).

  • 🏟️ Matchday (~19% of overall revenue).

    • The stadium Old Trafford is wholly owned by Man Utd, with a capacity of 74,240. Attendance has been over 99% since 1997 (excluding the pandemic).

    • Revenue includes ticketing and catering (food and drinks).

Revenue reached an all-time high of £627 million in FY19. While Matchday revenue is back to the pre-COVID level, Commercial and Broadcasting revenue are still lagging, primarily due to the team’s performance.

• Expenses include:

  • Employee benefit: Player and staff compensation.

  • Other operating expenses: Primarily variable costs from Matchday catering, policing, security stewarding, and cleaning.

  • Amortization: Costs associated with acquiring players are capitalized as intangible assets and amortized over the contract duration.

  • Exceptional items: Costs that are separately disclosed due to their nature, size, or incidence.

  • Profit on disposal of intangible assets: Players' disposals can lead to a profit or a loss based on the remaining value of the asset on the balance sheet. For context, Man United had a £22M profit on disposal of intangible assets in FY22 (not in the income statement diagram above).

• Margins:

  • The operating margin was positive before COVID (around 10% of revenue). However, it turned negative when Matchday revenue dried up. In the past year, the underperformance at the European level kept the P&L in the red. In addition, sponsorship revenue has yet to return to its pre-COVID level.

    

Overall, while the company used to be profitable before the pandemic, the underperformance on the pitch has translated into an underperformance in the financial statement.

Is the business sustainable?

The company generated £96 million in cash from operating activities in FY22. However, most of it was offset by the acquisition of new players (£85 million net payments for player acquisitions/disposals in FY22).

Despite the significant operating losses in the past two years, the Glazers decided to continue to pay themselves a dividend. It was deemed “indefensible” by the club’s independent supporters’ trust.

What to watch moving forward

Man United’s brand value is undeniable. But we have to wonder how much damage has already been done by the Glazers.

The recent departure of Cristiano Ronaldo (the most popular account on Instagram, with 500 million followers) added to an already challenging environment. Ronaldo has publicly criticized manager Erik ten Hag and the Glazer family.

The next owner has a lot of work ahead, on and off the pitch, to put the business back on the right track.

That’s it for today!

Stay healthy and invest on!

Disclosure: MANU is not in the App Economy Portfolio.