Description

Overview:

Manchester United (MANU) is one of the world’s most decorated and successful football clubs, playing in the English Premier League. The club boasts 1.1 billion global supporters and generates revenues from broadcasting, commercial and matchday revenues.

MANU is listed on the NYSE, and is incorporated in the Cayman Islands. MANU is controlled by the Glazer family; six siblings with roughly equal numbers of (predominately) Class B shares, which hold 10x voting rights of Class A shares.

In Feb-24, MANU had an ownership change, with British billionaire and boyhood-fan Sir Jim Ratcliffe (SJR) acquiring a circa 25% stake through the acquisition of an equal proportion of Class B and Class A shares. The transaction was at $33/share, valuing MANU at an EV of $6.4bn ($5.4bn equity, $1bn debt). SJR’s has committed an additional $300mn in equity investment at the same share price consideration, earmarked for much-needed stadium infrastructure improvements, increasing his stake in MANU to 28% today.

The BUY thesis is based on:

• SJR’s initial investment is likely a “stepping-stone” to him taking full control. The current arrangement facilitates SJR taking control of much of the day-to-day football decisions of the club through certain minority rights, but these rights expire after three years under the terms of a Governance Agreement. SJR is an unlikely candidate to take a role of secondary influence at the club after three years, given his significant financial investment made and following the dedication of significant time and resource towards operational improvement at the club.

• The Glazer’s being motivated sellers at the right price. A collective sale by all six siblings – and effective control of MANU – is the optimal strategy for maximizing their financial return. Class A shareholders have equal valuation rights to Class B shareholders (evidenced by SJR’s recent purchase of both Class A and B shares at the same price), and are thus aligned with the Glazer’s (likely) motivation of extracting maximum financial value in exchange for control of MANU.

At the current share price of $13.78 ($3.1bn EV), the most likely scenario sees a full sale by the Glazers at around $33/shares to SJR in circa two to three years, representing 139% upside and an expected IRR range of 34-55%. A sale by the Glazers to another party after Aug-25 – the earliest time a sale is permitted under a Shareholder Agreement – is also possible.

Background to the recent changes in ownership:

In November 2022, MANU announced “the Board will consider all strategic alternatives, including new investment into the club, a sale, or other transactions involving the Company”.  A drawn-out bidding process followed, primarily between two bidders – SJR and Bidder A (believed to be Sheikh Jassim backed by the State of Qatar).

The following are key highlights from the Schedule 14D-9 relating to the bidding process:

• May 16th 2023: Bidder A offered $30.01/share for all outstanding shares. 

• May 22nd: Representatives of MANU suggested to Bidder A that a sale at $35.25/share for all outstanding shares would be considered. This suggests the Glazers were willing sellers for all of their shares at the right price.

• May 23rd: SJR offered $33/share for 60% of Class B shares only, with a put/call arrangement for years 3/4/5 to acquire the remaining 40% of class B shares.

• June 1st:  Bidder A offered $34/share for Class B shares, and $24.81/share for Class A shares.

• July 26th: Following legal counsel, MANU representatives informed Bidder A that same per-share consideration should be received for Class B and Class A shares.

• October 13th: SJR offered $33/share 25% of Class B and 25% Class A shares.

• February 13th 2024: The SJR proposal, together with additional equity commitments, was accepted by shareholders. A Governance Agreement sets out additional terms (see below). The Glazer’s collectively retain majority control and optionality regarding the future sale of the business.

Governance Agreement

The sale to SJR included a Governance agreement, with key highlights as follows:

• SJR to nominate two directors to the board.

• SJR has certain minority rights for a period of three years from Feb-24, with player transfers and staff appointments requiring his approval. Since Feb-24, there have been meaningful staff changes (a new CEO and plans for a new Sporting Director), reports of cost-cutting reviews and a taskforce which will consider the viability of building a new stadium. All signs suggest SJR is running the day-to-day operations of MANU, and that his approach is long-term in nature.

• No dividends to be paid for 3 years from Feb-24.

• The Glazer’s are to not solicit or undertake a sale for 12 months from Feb-24.

• Drag Along provision, requiring SJR to sell shares in conjunction with the Glazers, which can be enacted after a minimum 18 months from Feb-24. If sold within 3 years from Feb-24, a minimum share price of $33 is required.

• Right of First Offer for SJR on a future sale of shares by the Glazers.

Valuation

Background

Historically, the large majority of football clubs globally have struggled to break-even, let alone achieve sustainable profitability. Many clubs have experienced reasonable top-line growth in recent years, driven by lucrative TV rights primarily, as well as improved commercial monetisation of club fanbases (noting MANU’s top-line has been hampered somewhat by more limited on-field success). However, such revenue growth is typically reinvested into higher transfer fees and player wages. Former Tottenham Hotspur owner Sir Alan Sugar commented following a blockbuster TV rights deal in 2015 that higher revenue would produce a “prune juice” effect, whereby the money “goes in one end and comes out the other and that is exactly what is going to happen with this money.” Historically, profitability in global football has been a secondary consideration to on-field success.

Until recently, football did not have a salary cap mechanism such as that seen in many American sports (e.g. NFL, NBA, which have circa 50% wage caps relative to revenues). However, more recently steps have been taken to improve football’s financial sustainability through Uefa’s (European football’s governing body) introduction of spending cap rules. In 2023, football clubs were limited to spending a maximum of 90% of revenue on players, ratcheting down to 80% in 2024 and 70% in 2025. Whilst a spending cap should aid profitability and advantage large clubs (like MANU, which have comparatively higher revenues), there are doubts as to whether such rules will be enforceable, particularly as State-owned clubs have historically flouted previous financial fair play rules and (to date) escaped meaningful punishment. Notwithstanding this, if implemented well, the spending caps should be a positive step towards football’s financial sustainability and clubs achieving future profitability.

Despite such profitability challenges, realized transactions of football clubs and other sporting franchises have meaningfully appreciated in recent years. Sporting teams are trophy assets; scarce by nature, and purchased for reasons relating to personal fulfillment, generating positive community/social impacts, political (i.e. sportswashing) motivations, and the financial view that someone might be willing to pay a higher price for the trophy asset in the future. A concentration in global wealth and increase in billionaires is not met with an equivalent increase in trophy assets, resulting in higher demand for something in limited supply.

Aswan Damadoran has written an interesting piece on trophy assets, which is worth a read: https://aswathdamodaran.blogspot.com/2023/08/money-in-sports-trophy-asset-effect.html

MANU valuation

Based on typical valuation measures, MANU’s current share price of $13.78 ($3.1bn EV) suggests a valuation in excess of its intrinsic value. Valuation metrics are more extreme at $33/share.

MANU has reported net losses each year since 2020 and is cumulatively free cash flow negative over the same period.

At $13.78/share and based on the midpoint of FY24 guidance:

• EV / Revenue = 4x

• EV / EBITDA = 18x

At $33/share and based on the midpoint of FY24 guidance:

• EV / Revenue = 8x

• EV / EBITDA = 37x

However, based on reported transaction values of other major sporting franchises (e.g. Washington Commanders at $6bn, Chelsea Football Club at $3.2bn), a valuation of $33/share ($6.4bn EV) for MANU does not appear egregious for a club of MANU’s status.

Lastly, $13.78/share is a modest 6% premium to the pre-disturbed share price of $13.03 as at 21st Nov-23, i.e. before MANU was “in-play” for a takeover. The odds of an outright sale over the next 2-3 years are clearly significantly higher.

The risk-return payoff at the current share price of $13.78 is asymmetric:

• A buyout in 2-3 years at $33/share represents 139% upside and an expected IRR range of between 34-55%.

• Using the “pre-disturbed” Nov-23 share price of $13/share as a reasonable/likely downside, a loss of -6% from today’s share price reflects the potential downside risk and represents a reasonable margin of safety.

Risks to thesis

1. The Glazer’s decide against selling in the future? The likelihood that all – or most – of the six Glazer siblings are committed long-term shareholders seems remote for the following reasons:

• Media reports had suggested that four of the six siblings were motivated sellers, with two of the siblings (Avram and Joel, who were more actively involved in club affairs) being less keen on a sale. However, Avram and Joel participated in the sale of shares to SJR, and their combined stake is now modestly below that of SJR’s.

• Investment needs and debt levels are high (even after SJR’s $300mn equity investment) and dividends cannot be taken by the family in the near-term, making continued ownership of the club less appealing from a financial return perspective.

• The Glazer’s remain subject to extreme negative fan and press criticism.

• During the bidding process, the Glazer’s solicited a bid from Bidder A for the entire company.

2. Only certain Glazer siblings sell to SJR?

The optimal strategy to maximize value is for the Glazer’s to sell all of their shares – and control of the club – collectively. Class B shares convert to Class A shares upon change of ownership (the sale to SJR was structured such that it was not the case for that transaction), making individual stakes less valuable when sold separately.

3. SJR does not intend to increase his stake?

SJR states his ownership of MANU is not motivated by financial interests. Day-to-day operational influence through certain minority rights for SJR expires following three years from Feb-24 as per the Governance Agreement. Having invested $1.8bn for a stake in the club, it is unlikely SJR would be content transitioning to be a position of secondary influence in three years’ time.

4. SJR can’t afford to increase his stake in the future?

Likely the biggest risk to the investment thesis. SJR’s wealth is largely derived from privately-owned chemicals company Ineos, of which he is a 60% shareholder. Two long-term shareholders hold the residual 40% stake in Ineos. SJR purchased his 28% stake in MANU solely. An in-depth analysis of SJR’s net worth has not been undertaken as part of this report, however, Ineos had normalized net income of around $2bn in both FY21 & FY22, and assuming a 6-12x P/E ratio range (vs. FY22 earnings) puts SJR’s Ineos stake at between $7-14bn (chemicals company LyondellBasell’s currently trades on a circa 12x FY22 PE, Celanese trades on 10x FY22 PE). FY22 financials are the latest available for Ineos which is why valuation comparisons are made on this basis. Ineos’ earnings are likely to be meaningfully lower in FY23-24 given the current cyclical downturn in the chemicals sector. SJR likely has other sources of wealth, highlighted by the fact that he did not monetise any of his stake in Ineos when taking his initial stake in MANU. The illiquid nature of SJR’s wealth, together with the potential to bring in additional partners, is the most likely reason why SJR initially took only a minority stake in MANU. A downturn at Ineos, an inability to monetise SJR’s wealth and/or an inability to bring in outside partners, are all risks to the BUY thesis.

5. Class A shareholders receive different consideration to Class B shareholders? Unlikely, given:

• The Glazers did not accept an offer ($34/share) from Bidder A for their Class B shares, which represented a level close to their asking price ($35.25). This offer had a lower valuation consideration for Class A shareholders.

• During the sale process, after legal independent US and Cayman Island legal counsel was taken, bidders were informed that any offer should have equal consideration for Class B and Class A shares.

• The MANU IPO prospectus states “The rights of the holders of our Class A ordinary shares and our Class B ordinary shares are identical, except with respect to voting and conversion.”

If different share price consideration was accepted by the Board, such action is highly likely to be met with significant legal challenges.

Catalyst

Monetization of net worth by minority shareholder Sir Jim Ratcliffe (and potential to bring in additional financial partners) to undertake a full buy-out and control of MANU. This is expected in the next two to three years, ahead of the expiration of a Governance Agreement which grants SJR minority rights that facilitate his operational influence over MANU currently.