Commentary

Great club ... terrible investment?

Updated: August 3, 2012, 7:28 PM ET
By Roger Bennett | ESPN

Until the 1980s, English football was run by an innocuous assortment of local businessmen who demonstrated a distinct lack of national ambition. Their financial model amounted to little more than "putting bums on seats" for home games. The creation of the English Premier League in 1992 changed everything, triggering a gluttonous gold rush. Some of the most sophisticated global sports business minds poured into English football to exploit the new frontiers of domestic, international and digital rights, and the exploding universe of commercial opportunities.

On Aug. 10, this global gold rush will break new ground as the Florida-based Glazer family, which owns Manchester United, seeks to sell 10 percent of the club as an IPO on the New York Stock Exchange. Three months ago, Manchester United was transformed into an "emerging growth company" registered in the Cayman Islands. Now, the Old Trafford club is poised to become the ticker symbol MANU, traded on New York's Big Board.

The IPO will make 16.7 million shares available at an expected price of between $16 and $20, raising approximately $300 million, and driving the club's total valuation to $3 billion. It's a remarkable sum, twice the $1.2 billion the Glazers paid to acquire the club in 2005 when they took the club off the London Stock Exchange and saddled it with debt, last reported at $656 million, in a leveraged buy-out.

Shorn of its financial elements, the IPO exposes the straining tectonic plates that lie just beneath the surface of the modern English game -- the ever-increasing gap between the agendas of club owners, fan base factions and potential investors.

Crudely put, this gap in Manchester United's case pits those who revere the 134-year-old club as the hallowed home of Bobby Charlton, George Best and Eric Cantona, and who expect the transfer market to be the priority destination for the club's commercial profits so it can add to a record-haul of 19 league titles, against others who are perceived to view United primarily as a platform to sell 2 million jerseys a year, engage 26 million Facebook followers and profit personally from the team's status as the richest side in the world (according to Forbes, which estimates it to be $385 million more valuable than the Dallas Cowboys and New York Yankees).

The IPO, led by New York City-based investment bank Jefferies, has been tinged by the surreal. It's been an on-again/off-again process, abandoned first in Hong Kong, then in Singapore due to lukewarm demand, culminating in an eye-boggling valuation with the synchronized announcement of a record-breaking jersey-sponsorship deal with Chevrolet, which Reuters reported as being worth up to $600 million over seven years.

This stock will appeal to anyone looking to express a deep fan affinity rather than a real investment strategy.

-- Scott Rosner, sports business professor, Wharton School, University of Pennsylvania

These financial headlines have been accompanied by a John Le Carre novel's worth of subplots, including a change in destination for the profits, the mysteriously abrupt resignation of Chevy's chief marketing officer, and legendary coach Sir Alex Ferguson's public denial of allegations he was set to personally benefit from the transaction.

This drama has been enhanced and complicated by the ongoing silence of the Glazer family, which has been interviewed on the record only once about United since taking over the club. Jefferies, deemed by many to be a surprisingly small yet scrappy choice to act as lead banker on the deal, has been unwilling to comment for legal reasons. As a result, the owners' long-term intentions remain opaque.

This lack of transparency has heightened fans' anxiety, leaving them to analyze the minutiae of the IPO in the hope of reverse engineering the Glazers' intentions, including why an English football club will be traded on a New York exchange in the first place.

Even those who routinely root for any sign of growing American involvement in the world's game may find it hard to cheer for this one. "This may seem like an odd time to launch an IPO in the U.S. after the high-profile failures of Zynga and Facebook," said Scott Rosner, a sports business professor at the Wharton School, University of Pennsylvania. "But the attraction for the Glazers lies in the 'dual-class' ownership structure allowed on the NYSE." American regulators' light-touch permits the Glazers to retain 10 votes for every share they hold, while awarding merely a single vote to each new share, a structure which allows them to sell 10 percent of their holding yet retain 98 percent of the voting power.

[+] EnlargeCristiano Ronaldo
John Peters/Getty ImagesUnited sold Ronaldo to Real for 80 million pounds in 2009, yet perhaps as a sign of the club's struggling fortunes, it hasn't splashed a ton of cash in the transfer market since then.

Both Google and Facebook employed this dual structure in their IPOs, but as Andy Green, a football finance blogger, explained, "Larry Page and Sergey Brin built Google from nothing into one of the world's greatest companies with their unique vision. There is nothing unique about the Glazers that necessitates their control of United has to be uniquely preserved."

Mohannad Aama, senior portfolio manager at Beam Capital Management, agrees, warning the dual structure is a "terrible red flag" because the owners "can continue to act in their own self-interest after the IPO without ever having to align that interest with that of their new shareholders."

The projected pricing range of $16-20 a share has also shocked many analysts, including Guardian financial editor Nils Pratley. "Six times revenues," he exclaimed. "That's a rating associated with go-go technology stocks where income doubles every couple of years."

In a 40-minute RetailRoadshow, a multimedia presentation, Manchester United attempted to justify the price by articulating its best sales case. The club is described as "one of the most successful and iconic sports brands in the world" with "more sports fans than any other team in the world," a number they compute to be "659 million followers," while promising "to engage with them in a much deeper manner and obviously to monetize that as well."

Philip Hall, partner at Inner Circle Sports, which has completed several Premier League acquisitions, validated the club's revenue-generating success. "United have built a world class sporting organization underpinned by a very strong commercial department that has created a series of staggering sponsorship deals," he said. The maze of global partnerships the club has struck with official airlines, banks and beers in every region has made it football's gold standard.

Despite this, Green considers the valuation to be "crazy," pointing to the frailty of the sporting business model. "The profits at Manchester United fell last season simply because they did not qualify for the Champions League knockout stages," he said. "This proves things can go wrong at any time, even at the biggest club in the world."

While the Roadshow boasts Manchester United has "hardly begun to monetize" areas as diverse as "energy" and "consumer electronics," few analysts project the kind of explosive revenue growth required to justify the share-pricing. Premier League clubs may continue to benefit from dizzying media rights deals, yet the share they receive has a bigger, proportional bottom-line impact for smaller-clubs such as Wigan or Everton, whose revenue base is tiny compared to United's. In all cases, such increases can be eaten up by the accompanying increases in player salaries.

Who stands to profit?

Another controversy has been sparked by the ultimate destination of the IPO's profits. The club originally expressed the intention of using the proceeds to pay down debt, enabling it to upgrade the squad by competing more aggressively in the transfer market. Even the club's Roadshow acknowledged the critical nature of this step, acknowledging "success on the pitch is central to our strategy." The announcement that the Glazers now intend to keep half of the profits has been received with surprise. As Green computes the numbers, "with half the money now going to the Glazers, the IPO will only save us a paltry $7.78 million a year, which is not enough to buy Wayne Rooney's foot."

[+] EnlargeAlex Ferguson
John Peters/Man Utd via Getty ImagesSir Alex Ferguson, seen here attending an event for one of United's new sponsors, Chevrolet, has said he will not gain financially from the club's IPO.

Aama was damning in his summary of the offering. "They are not a good investment at the rumored sale price as there are so many red flags on the balance sheet and in their dual-class voting structure," he explained before referring to the poor performance of the Boston Celtics, Cleveland Indians and Florida Panthers during their brief experiences on the public market. Aama added, "historically, sports franchises have not proven to be good investments in the United States."

For Manchester United and the Glazers, a critical question remains. What would motivate an investor to pay up to $20 for a share which offers no dividend and unequal voting power? Philip Hall conjured the most positive spin, explaining that "the recent Dodgers sale proved that sports content and the rights fees it commands can generate higher and higher revenues. So an investment in Manchester United offers buyers an ownership stake in the one of the greatest content providers in the world's most popular sport."

In Andy Green's analysis, "United are trying to make the case they have barely scraped the surface of what is commercially possible because they have a global fan base of 659 million, and all they have to do to grow is get $10 off each of them every year," he said. "That prospect is so outlandish you would have to believe real investors are stupid enough to own gold plated bathtubs if you think they'll buy into that."

Rosner suggests the IPO's success may boil down to whether it can attract enough obsessive fans who already own enough replica jerseys, scarves and John O'Shea bobbleheads. "This stock will appeal to anyone looking to express a deep fan affinity rather than a real investment strategy," he said. "I am a Manchester United supporter, and I would never invest in the stock. For the share price, you are basically buying a piece of memorabilia you will never get a return on."

When asked if he can conjure a positive long-term scenario for the club under its current owners, Green is stumped, calling his inability "painful." That said, he confesses his love for the team is not diminished. "The experience of United scoring is no different to how it felt when I was a kid," he admits with a sudden relish. "I can't tell you how much pain I felt when [Sergio] Aguero scored to clinch the title for Manchester City [last season]. All supporters can demarcate the difference between off-the-field and on-the-field. I find it impossible to want anything apart for Manchester United to win."

Roger Bennett is a columnist for ESPN, and with Michael Davies, is one of Grantland's "Men In Blazers." Follow him on Twitter: @rogbennett.