Manchester United plc: Not expecting much movement in the near future (NYSE:MANU)

Last June I evaluated Manchester United plc.New York Stock Exchange: Manu) Purchase considering the possibility of a takeover offer. Since then, the stock price has fallen about 20%. That doesn’t fit In the meantime, open offers were indeed made, but not for all outstanding shares. In this article, I’ll take a look at recent developments and explain why I left the English Premier League record champions. Please note that the following “football” refers to the sport that American readers may know under the name “soccer.”

What has happened since then

As it turned out, my preferred acquisition option, an all-cash acquisition by a Qatari consortium led by Sheikh Jassim bin Hamad al Thani, did not materialize. Instead, Ineos plc founder Sir James Ratcliffe acquired around a quarter of the club’s shares through Trawlers Ltd. We split Class A common stock and Class B common stock equally at $33 per share and invested an additional $300 million. It certainly wasn’t as good as an outright acquisition, but it was better than no deal. I happily bid for a quarter of my share.

The sports season so far has been pretty disappointing. They performed disastrously in the UEFA Champions League and performed poorly in the Premier League. At least a strong performance in the FA Cup is a good thing (at the time of writing, Manchester United are through to the semi-finals, where they play underdogs Coventry City on April 21).^castle – after a last-minute win against arch-rivals Liverpool). Off the pitch, Manchester United have been more successful. First, Qualcomm Inc. (QCOM) will replace TeamViewer SE (OTCPK:TMVWF;OTCPK:TMVWY) as the front-shirt sponsor starting next season, reportedly paying an annual fee in excess of GPB60 million. This represents a significant increase compared to the current transaction, which is estimated at GPB47 million. For 1 year. Additionally, the contract with kit supplier adidas AG (OTCQX:ADDDF;OTCQX:ADDYY) has been renewed for a further 10 years with a guaranteed value of GPB90 million per season. The first two deals are big fish, but there are some smaller deals as well. Notable new commercial partnerships include Malaysia Airlines becoming the Club’s “Official Commercial Carrier” and Estee Lauder (EL) later becoming the “Official Skincare Partner”. This is a position that has never existed before (and frankly, as a football fan, I am not). totally confident must It exists, but with my investor hat on, I’m not complaining about revenue growth.)

There is also a change in operational leadership as the company recruits Omar Berrada from crosstown rivals Manchester City. His appointment could help improve his sporting performance over time through better and more efficient player transfers. More importantly, he has a reputation as a tough negotiator who rarely overpays. This is certainly good news, considering Manchester United tended to overpay heavily on new signings under former CEO Richard Arnold and his predecessor Ed Woodward.

What’s to come

Recent developments bode well from a revenue perspective, at least as long as sporting performance recovers enough to secure Champions League participation on a sustained basis. But revenue is only one side of the medal. The other aspect is cost. And that’s where the whole incident becomes less pleasant. After years of neglect, Old Trafford needs some work. To be precise, the work is worth more than $1 billion (according to conservative estimates). Also, transfer fees are not exactly trending downward. And as any fan of Premier League football will tell you this year, Manchester United clearly need to strengthen their roster to get their sporting performance back on par with the best teams in England, let alone Europe.

Most of the previously mentioned sponsorship contracts are effective from next season. Even an abysmal Champions League performance this year would have had a negative impact on revenues. Even if they could win the FA Cup, that wouldn’t completely solve the problem. It is therefore not surprising to see net losses increase significantly in FY2024 (which ends June 30, in line with the sports season, not the year), following 28.67 million GPB (or 17.6 pence per share) in FY2023. There will be further revenue growth from 2025 due to the Premier League’s new media rights deals. This contract has a roughly 10% higher annual value than the current contract, with the revenue sharing system between individual teams remaining roughly the same. However, return to profitability is not guaranteed and may depend on sporting performance. Anyway, I think it’s very unlikely that dividend distributions or share buybacks will happen in the next few years.

FYI, contrary to what I initially expected, the deal was funded debt-free (or at least debt-free at the Trawlers Ltd. level). While fans are still reeling from Malcolm Glazer’s 2005 leveraged buyout, they’ve probably breathed a sigh of relief. It also means Sir James has less incentive to extract maximum economic value from Manchester United. If anything, one could actually imagine bringing in an expensive new star player during Sir James’ first transfer window as co-owner. This kind of “gift to the fans” is not unheard of in European football – quite the opposite, in fact.

No possibility of acquisition

For the time being, I think the likelihood of a takeover/privatization of Manchester United has been somewhat reduced. If Sir James had wanted to acquire a significant portion of Glazer’s non-owned stock for $33 a share, he would certainly have done so. This tender offer is likely motivated by the board’s concerns about fair and equal treatment of minority shareholders. If the Glazers had been given the opportunity to cash in, a lawsuit would have been almost certain. Obviously no shareholder will sue for being given the ability to sell shares. higher Calculate the percentage of your stake with a huge premium. It should also be borne in mind that, at least in theory, Sir James/Trawlers could purchase Class A shares on the market at significantly lower prices. In fact, this could lead to a price spike if it becomes public knowledge. This will be in accordance with the SEC’s disclosure requirements. It should also be taken into account that in the case of Manchester United there is no mandatory takeover offer once certain ownership criteria are met.

The possibility of a third-party takeover has now become much less realistic, as in addition to the (often indecisive) Glazer siblings there is another major shareholder in Sir James. If he was intending to turn the club around at the next good opportunity based on Glazer’s willingness to sell, there’s really no point in proceeding the way he did. He could have simply acquired the Class A shares on the open market for much less than the $33 price he ended up paying. On the other hand, the Glazers could theoretically be forced to sell the company within 18 months of the closing of the deal with Sir James, subject to the same terms (subject to the right of first refusal). Do not influence other shareholders. Money is money). However, I believe that their motivation is probably not to sell at all. Otherwise, I probably would have done it this time. On the other hand, buyers don’t seem to want to buy at Glazers’ fantastic prices. At present, it is unknown why the Qatari consortium, let alone other parties that did not participate in the first round of bidding, should present an earlier offer. However, I would caution that there is always the possibility of a sudden change of mind when it comes to trophy assets. The story of Point72’s Stephen Cohen and Picasso comes to mind. If you are unfamiliar with this story, I highly recommend Sheelah Kolhatkar’s book. black edge, It says that and many other things – but I digress.

conclusion

Sports teams are trophy assets and should be valued. (European) football clubs, much more so than other teams/franchises. Manchester United are no different in this respect. In fact, the opposite is true. The profits are somewhat predictable, and the transfer system and Champions League payouts make them difficult to predict at all. Calculating a forward PE multiple is impossible when sudden transfers in fees of $100 million or more can easily occur a day before the end of a particular fiscal year.

In the case of Manchester United in particular, there is the fact that a significant sponsorship and kit deal has just been renewed, while new media rights deals for both the Premier League and European club competitions will come into effect next season. This means explosive revenue growth (excluding external transfers, which are inherently unpredictable) is not expected beyond FY2025.

As a business, the company is not exactly valued at about 3 times its revenue based on fiscal 2024 guidance (GPB665 million = approximately $840 million at current sterling exchange rates). This is because profitability is difficult to predict and net losses are likely to occur. predictable future. On the other hand, a trophy asset that just a few months ago was willing to assign a value more than twice what its current market price would imply doesn’t exactly extend to just below $15 per share.

Absent renewed interest in the privatization proposal for Class A shareholders, I expect the stock to move broadly sideways to roughly $13 to $16 for the foreseeable future. Personally, I sold the remaining shares I acquired for just over 17 for about $14.60 per share (at current exchange rates, I sold them through the euro-denominated trading gate, not the NYSE). So it might sound counterintuitive to rate the stock as a Hold rather than a Sell. Give me a few more seconds and I’ll be happy to explain my reasons. In itself, I don’t think there is excessive downside risk and the immediate upside potential is not clear. However, in the context of my portfolio, I have identified other things to invest in. There are also tax considerations that make realizing paper losses now an opportunity.