Description

Manchester United soccer club (MANU) is likely to be acquired for $32-36/shr within 2-3 months and the stock trades at $21.5 today, up from a $13 undisturbed price. We see 50-70% upside in a likely takeout, 40% downside to the undisturbed price, and various scenarios with less downside. On an expected value basis we see 20% upside and a triple digit IRR. We think structuring this trade through options offers an even better 4-1 upside/downside. This is a fast moving situation so we will keep the writeup relatively short and are interested in feedback from the VIC community, particularly any pushback.

First off, we should clarify that we do not believe there is a fundamental valuation case for MANU to be worth $32-36. In the five years pre-Covid, the club generated a cumulative EPS of $0.46, and the stock has been written up twice as a short on VIC for similar reasons. However, in our view this is not relevant to the trade as in practice two bidders appear to be willing to pay up for MANU for non-fundamental reasons. The two bidders are Qatar, bidding for sportswashing purposes, and Ineos, bidding because their Founder & largest shareholder is a MANU fan. We expect Qatar to outbid Ineos given its much greater financial resources.

First round bids were made in late February for roughly £4.5bn or $28/shr, but this was effectively just the minimum offer required to proceed to the next round. Second round bids were made two weeks ago and are reported by a few respected journalists to be over £5bn or $32/shr. The Glazer family that controls MANU have briefed the media that they are holding out for £6bn or $40/shr, but our guess is that they will settle for £5.5bn or $36/shr in a third round of bidding. We expect to have confirmation of the second round offers in the next few days and for third and final round offers to go in by late April/early May. All sides are looking for a quick timeline because the soccer season ends in May and the club needs to know who its owners are beyond that to determine its budget and strategy for player transfers this summer.

The stock at $21.5 trades at a large discount to these prices for several reasons. 

Trading volume was just $7mm/day until recently and in our view the club and industry are not well understood by investors. For instance, questions on earnings calls are often ridiculed by UK media, and for good reason. Most recently, the stock has declined over 15% since March 22 seemingly because some media reported that the club received no bids by the soft deadline for second round bids. In fact, what happened was that the Qatari bid was made in time but Ineos asked for a brief extension and submitted their bid the next day. And because Ineos received an extension Qatar withdrew their bid, before resubmitting it within 48hrs. Both parties had visited the club a few days beforehand and so had only days to submit their second bids. We believe that the missing of the soft deadline does not indicate anything about the size of the bids, and the stock reaction is as a result of these actions being dramatized by the media given the popularity of the club, rather than happening behind closed doors like in most takeovers.

More rationally, there is a legitimate concern that the Glazers will reject an outright takeover offer and instead seek a minority investment. The background to this is that the Glazer family own 69% of the club but this is split between six siblings who until recently were not aligned on what to do. Four of the siblings have wanted to sell for years, while the two who are active in the club’s operations want to stay. It is likely that the two are the ultimate source for the media’s reporting they believe the club is worth over £6bn (which is of course also a bargaining position). In parallel to the sales process, the family has spoken with several investment funds who could buy out some or all of the four sibling’s stakes. Yet while the Glazers accepting a minority investment instead of a full offer is a genuine risk, reputable journalists have reported in the last few weeks that the siblings have now agreed internally on a price at which a full sale would be accepted. Our guess is that number is somewhere between the £5bn+ second round bids and the £6bn stated asking price. For that reason, we are using £5-£5.5bn or $32-$36/shr as our Base/Bull cases.

There is a second legitimate concern, which is that Ineos (who are unlikely to outbid Qatar in our view) has implied that it is initially only bidding for the Glazer’s shares and may not make an offer for public shareholders immediately. This is possible because MANU has a dual-class share structure with the Glazer’s Class B shares giving them 95% of the voting rights and public shareholders owning Class A shares. MANU is registered in the Cayman Islands and is a foreign private issuer, which means Class A shareholder approval will not be required for a change of control and Ineos could attempt to buy only the Glazer’s Class B shares. We think in this scenario Ineos would eventually acquire the Class B shares anyway, but that could be months/years down the line and that the stock would settle somewhere between the undisturbed price of $13/shr and the acquisition price. The options would likely be worthless in this scenario. If other VIC members have a different interpretation, we would be interested in the feedback.

Putting all this together, we see an expected value of $25.7/shr or 20% upside. That translates to a 66% IRR if the deal is consummated by the start of the next Premier League season (Aug 12, 2023) or a triple digit IRR in the likely scenario of a much quicker outcome (e.g. within 2 months).

Appendix - Why would someone pay £5bn+ for a barely profitable soccer club?

Aside from the emotional or egotistical reasons that attract some bidders, we believe that the Qatari bid is essentially a marketing exercise. The value to Qatar is therefore not the FCF MANU produces but the $ per marketing impression the club generates.

Although the Qatari bid comes from Sheikh Jassim, who is portrayed as bidding in a personal capacity, it is widely speculated that his bid is backstopped by the Qatari state and is intended for sportswashing purposes. Qatar recently hosted the World Cup for similar reasons, which is considered a huge marketing success by the country despite the negative portrayal in much of western media. A Forbes article recently penned the cost of the World Cup to Qatar at over $200bn, which if anywhere near true makes MANU a bargain given the World Cup’s publicity lasts for roughly one month whereas MANU is discussed daily/weekly by hundreds of millions people and is a growing marketing annuity. With the World Cup success and neighbors Saudi Arabia and the UAE both owning Premier League clubs for similar reasons, there is clearly a view in the Middle East that owning a Premier League club is an effective use of marketing dollars.

Another way to calibrate this is to compare MANU’s valuation to Chelsea, an elite but less prestigious Premier League club that was subject to a forced sale by Russian Billionaire Roman Abramovich after the Russian invasion of Ukraine last year. The Chelsea acquisition price was £2.5bn upfront with £1.75bn in committed investment. Since this was a distressed sale, our guess is an orderly sales process with no committed investment would have fetched a price closer to £3.5bn. As the table below shows, MANU generates roughly 1.6x the marketing impressions as Chelsea, and 1.6 * £3.5bn = £5.5bn, which is in line with the £5-5.5bn we expect MANU will be sold for.

Catalyst

Takeover