coward_lion/iStock Editorial via Getty Images
Dwindling fortunes on the pitch, and on the books
The past few years have been as tough for Manchester United’s (NYSE:MANU) investors, as they have been for the club’s fans. The well-respected English Premier League Club has been having quite a rough ride, and, as it goes in sport, the club’s financial prospects started dwindling along with its lack of achievements on the pitch. The share price today is exactly where it was a decade ago. The stagnation of the share price has exactly matched the stagnation in football progress.
The iconic English club has not won the local Premier League since their legendary manager and coach, Alex Ferguson, departed in 2013. The last time Man U won any tournament at all was in 2017 when it won the second-grade European UEFA Europa League. The club did not win Europe’s higher-level Champions League since 2008.
The club’s lack of fortunes on the pitch has caught up with its finances. After being the highest-earning English football club for many years, Man U’s financial throne is finally overtaken by its more powerful rivals. After reaching record revenues of GBP 627 million in the financial year 2018/2019, the club’s revenues have been decreasing since – a fifth lower in the last financial year ending June 2021. Revenues have recovered in the nine months ending 31 March 2022, driven by the return of fans to its mega Old Trafford Stadium – the second largest in England – but broadcasting and commercial revenues are subdued by the failure of the club to reach advanced levels in any major tournament. The other Manchester team, Manchester City (“Man City”), has been having contrasting fortunes over the past few years, with revenues up by 7% in the past two years, and overtaking Man U as the highest-earning football club in England. This success has been correlated with Man City’s astounding success in grabbing four titles in the past five years in the Premier League.
Even Man U’s arch-rival Liverpool, with its much smaller Anfield stadium, is likely to eclipse Man U’s revenues in the near future. Liverpool’s media and broadcasting revenues already eclipsed those of Man U in the past financial year, given Liverpool’s better success rates, especially in Europe’s highest level tournament, the Champions League. Commercial revenues of Liverpool were only 6% behind those of Man U, and the way both clubs are heading in opposite directions, it is likely that Liverpool will supersede in that measure of revenue as well.
If Man U has been doing something right financially, it has been keeping the wages to revenues ratios well below the top three teams in the PL; only 56% at Man U compared to 73% at Man City. But ask Man U’s fans, and they would tell you that the two are correlated; lower-paid players deliver lower quality results. Indeed, Man U’s positioning in the PL has been consistently behind the two leading clubs, Man City and Liverpool, who also are the ones with the highest wage bills.
Is football a worthy investment?
No one can argue that European football is a business of big money. And among the big money, England’s Premier League (PL) is by far the highest-earning football league in the world, easily eclipsing the other four big leagues in Europe. The EUR 5 billion of revenues that the PL generates represent 35% of the revenues of the Big 5, and is 60% higher than the second highest-earning league, Germany’s Bundesliga. Stadiums are utilised at full capacity in the PL, ensuring consistently high matchday revenues, and a quick recovery from the COVID-19 lockdowns. England was one of the last European countries to shut down stadiums to fans, and one of the first to reopen them, ensuring the pain to English clubs was more limited than their European peers.
According to Deloitte Annual Review of Football Finance, the largest five leagues in Europe (which happen to be in the largest five countries by population) have doubled their revenues in the past 10 years to reach approx EUR 17 billion. Broadcasting auction rights have been soaring consistently, and so have been sponsorships and other commercial sources of revenues.
Football clubs can be compared to rare art; they are too tempting for acquisition, and their name gives prestige, glory, and fame to their owners. This has been indeed the case with many of Europe’s top football clubs who have been used for that purpose by wealthy investors from around the globe.
While this remains to be the case, the financial prospects of European football clubs are better today than ever. The brand equity has been significantly over the past decade, and so have been revenues coming from broadcasting and commercial sources. The European Football Association, UEFA, and national leagues in Europe, have introduced strict financial regulation to ensure that clubs live within their means, and that wealthy shareholders cannot just buy titles by throwing unlimited sums of money in buying trophy players, thus creating unfair circumstances and weaker competition in the game. These combined factors have made European football clubs worthy of consideration for the risk-embracing investor.
Risks not in short supply
Investing in a sports club is tricky, and is not for the fainthearted. The share price can fluctuate significantly with every game, and it is impossible to forecast how well a football club will perform every season, which can create significant volatility in the broadcasting and commercial revenues from one year to another.
Volatility is augmented by small float of Man U, as the bulk of shares are with controlling shareholders. So not only fans would be suffering from anxiousness over the points, but also investors would be suffering the anxiousness over their money. Combining the two would lead to a stressful life. I would not recommend for fans to be investors.
And then return on investment is another area that is challenging to predict. While common sense would conclude that investing in tried and tested coaches and players should generate good results, this is often not the case, as the performance of human beings in a competitive sports is not as predictable as machines.
Downside priced in Man U’s valuation, upside is tempting
Unlike rare art items, football clubs can generate significant amounts of cash flow. While they usually make little to no net income due to the high amortisation expenses of players’ registrations (aka contracts), adding back those amortisation accounting expenses to cash flows leads to a considerable operating cash flow generation. Man U generated GBP 350 million in the past three years, including the COVID 2020 year when operating cash flow was negative GBP 3 million. In 2021, operating cash flow was 22% of sales revenues. These are numbers for any business. And the ultimate measure of cash generation – free cash flow – was also a positive GBP 100 million in 2021 and 2019 (2020 COVID year was negative GBP 213 million). Aside from brand equity, these operational cash flows are what create financial value for the business, and they are what pay dividends to shareholders and repay debt of creditors. Man U’s valuation on a P/E ratio level would usually generate a minimal or negative result, but current market cap of GBP 1.5 billion over operating cash flows of GBP 113 million generate a more reasonable 13 times ratio. There are limited market comparables, as the vast majority of football clubs are held in private hands. But within the listed ones, Italy’s leading club, Juventus, trades at a market cap to operating cash flow of 22.4 times, and Germany’s Borussia Dortmund is trading at 25 times.
In terms of transaction multiples, the biggest one in football history was the recent acquisition of English peer Chelsea Football Club by a consortium of investors for GBP 4.25 billion highlights the potential upside for Man U investors. This is almost three times the current market cap of Manchester U, and compares to revenues of GBP 435 million for Chelsea versus Man U’s GBP 494 million in the same period (Chelsea does not disclose full financial statements). Given the severe disaffection of Man U’s fans against the controlling shareholders, the Glazer family, the prospect of a sale in the foreseeable future of Man U should not be discounted, especially of the Glazers feel that the money they are throwing in the club is not being matched by an increase in returns.
For investors willing to play the game, significant upside could be achieved. You can bet that the Chelsea transaction made the Glazers think hard whether Man U should follow. If yes, it can safely be assumed that Man U should grab a comparable ticket to that of Chelsea, creating significant acquisitions upside. Man U’s brand value is at least as big as Chelsea’s and its history and achievements exceed those of any other English football club. And Man U’s Old Trafford is a much larger stadium than Chelsea’s Stamford Bridge, thus Man U can generate higher matchday revenues than almost any other English club.
And if we assume that Man U’s performance on the pitch is bottoming out (how much worse can it get really?) and that the new capable coaching manager who was appointed can turn around the fortunes of the club, financial revenues should pick up again from where it stopped a couple of years ago. This would reflect on the share price positively, and should provide investors with handsome returns – sale or no sale.