This essay was written as part of final year studies in University College Cork.
Class: EC 3119 Capital Markets and Asset Valuation
Grade: 1st Class Honours
Introduction of Company
Manchester United plc, together with its subsidiaries are the owners of Manchester United Football Club which is located in the United Kingdom. In 2017 the franchise was and still is one of the world’s most recognisable sporting entities, making it one of the world’s highest earning sports teams. In fact, the franchise ranked as the 3rd highest valued sporting franchise behind the Dallas Cowboys and the New York Yankees in the world across all sports. (Forbes 2017) This makes the club which was founded in 1878 under the name Newton Heath the most valuable sports franchise outside of the United States of America as well as the most commercially successful football club in the world. The club is owned by an American family known as the Glazers. The takeover of the franchise was a gradual one, but by the end of May 2005, the family owned 98% of shares. Since the acquisition, the clubs revenue has skyrocketed. Much of this is due to TV and sponsorship revenue. This sponsorship includes £361 million over seven years from Chevrolet, £120 million from Aon over eight years and £750 million from Adidas over ten years. However, the family has come under criticism from fans and the media alike for burdening the once debt free club with such amounts to pay back. A debt that would reach its peak at £777.9 million. (BBC 2015) The main franchises liabilities come from wages of the playing staff. This includes Alexis Sanchez who earns £350,000 a week while Paul Pogba earns £290,000 a week making them the two highest earning footballers in England. (Daily Mail). In this piece, I will estimate the fair value of the company using different financial models. Describe the economic/financial data of the franchise and finally ask the question of whether the franchise is worth investing in or not.
Focus on Stock Description
The following data was collected from Yahoo Finance on March 15th, 2018. Manchester United plc (MANU) was first floated on the NASDAQ New York stock exchange on the 10th of August 2012 and has remained a constant figure to this day. On that day stocks opened to the floor at $14.05. As of March 15th, 2018 stocks are available at $20.00. This increase can only be expected with the increasing about of money coming into the game of football as mentioned above. Over a 52 week period, the stock has seen a 20% change in value, seeing the stock reach a yearly low of £15.86 and a high of £22.15. These fluctuations are understandable. Manchester United PLC appears in both British and international newspapers on a daily basis for both positive and negative reasons. Public opinion on how a sporting franchise is doing can change more often than other industries, and this will naturally affect the stock price. Despite this, the 200 days moving average of the stock is $19.19, while the 50-day moving average stands at $19.54. This along with the fact that the stock was valued at $20.00 on March 15th, 2018 would suggest that the stock is a bullish stock rather than a bearish. The stock at a bare minimum is keeping in line with its 50-day average. Finally, according to the Manchester United 2017 financial report, the weighted average number of shares is 164.025 million with the basic earnings per share (EPS) standing at £23.88 or $33.76.
Wider Financial Description
The following information comes from the 2017 Manchester United financial report. The information will be given in British Sterling. (Fig 1-3). Ending in the year of June 30th, 2017, the revenue of the franchise stood at £581.204 million. This can be broken down into commercial activity which includes the selling of merchandise (£275.471 million), broadcasting from companies including Sky and BT (£194.098 million) and match day revenue from ticket sales at (£111.635 million). With the total operating cost standing at £511.315 million which gave the franchise profits of £39.177 million in the year ending June 30th, 2017. The total assets of the club have a value of over £1.5 billion while the liabilities stand at over £1.056 billion. This means the total equity at the club is £477.617 million which is a decrease from 2015 and 2014. As this report already mentions, when the franchise was taken over by the Glazer family, the franchise accumulated in a lot of debt. This has resulted in significant amortisation fees. In 2017 the club paid out £124.43 million in such fees. While the club is capable of paying such fees/loans with a revenue stream of £581.204 million, such loans are and will continue to be a constant reason of worry for everyone involved as well as potential investors in the future with this number tending to rise with each year. In June 2017 the Interest Before Earnings, Tax, Depreciation and Amortization stood at £199.898 million, increasing substantially from previous years.
Estimating the fair value of the share price and explaining why the model is used.
Model 1
As already mentioned the market value of the Manchester United PLC stock is between $19 and $20. If I decide to use the 200 days moving average, it stands at $19.19. While this is seen as the market value, it is not necessary the fair value of the stock. The first model I would like to use is to calculate the average return of the stock. This will be done by calculating the average return of the stock over a 12 month period. The purpose of this calculation is to measure the stability of a stock. The less that a stock return varies, the more stable the stock is. This is calculated as follows;
Fig 1:
P1 = Previous Month
P2 = This/Most Recent Month
D12 = Dividend paid at each period.
See working outs from figure 4-6.
Model 1 Analysis
On average over a 12 month period, the average percentage return on Manchester United PLC stock is + 1.27%. This period sees highs of 16.1% (November 1st, 2017) which a low of -4.62% (December 1st, 2017) This is a considerable variation in return making the stock very unstable. The public opinion of a football club can change very quickly, and this can affect the stock price. The clubs strong stock price increase in November 2017 was a result of a positive number of results for the first team in October 2017. This included five wins from six including two wins in the Champions League which is played on a European scale. (Manchester United Fixture List) While on the other hand in November the first team lost two of their five games including against rivals Chelsea. To further back this theory, the share price value increased 9% on September 1st, 2017. In August the 1st team won their opening 3 Premier League games convincingly with the total £147.96 million pound investment in Romelu Lukaku, Nemanja Matic and Victor Lindelof looking like positive business. (Transfermarkt).There is a very clear correlation between results for the first team and the value of the Manchester United PLC stock price (MANU). I believe this evidence makes this franchise a very risky investment as one mistake on the pitch or referee decision can alter how a month is interpreted. A club of this size is expected to win the Premier League, but with United trailing Manchester City by 16 points this hope is a long way. This gap could potentially limit how positively the franchise could be seen for the next few months or even years and therefore affect the stock price negatively. The club says as much themselves in their 2017 annual report stating ”our dependence on the performance and popularity of our first team” is a “factor of influence” (Manchester United Annual Financial Report)
Model 2:
See calculations in Fig 5
If we compare the total revenue for Manchester United PLC in 2013 (£363.189 million) and 2017 (£581,204,000) we can see that the revenue has increased by just over 60% in four years. With the exception of 2015, the club recorded increasing revenue from one year to the next. In 2014, 2016 and 2017 revenue change changed within a 1.5% range. Between 2014 and 2017 the average increase in revenue was 4.75% with 2015 dragging this figure down from 6.4% based on the other 3 years. 2013 brought with it, both the highest level of % profit as well as the lowest total revenue.
Model 2 Analysis
Despite revenue increasing overall the revenue took a sharp dip between June 1st2013 and 2014. May 2013 saw the retirement of long-standing manager Sir Alex Ferguson. While under his 26-year stewardship the first team never finished below 3rdin the Premier League. But come May 2014 the club had finished 7th, its lowest position in over 20 years. While revenue increased, employee benefit expenses also increased as the club tried to return to glory with big money signings and higher wage packages. This increase in costs reduced overall profitability despite increasing revenue. The safe running of this business financially is very dependent on the first team performances. It is no coincidence that the club recorded a loss after the season in which they did not take part in any European competition and therefore did not receive this source of revenue from UEFA. (UEFA Revenue Distribution)
Investment Strategy
As already mentioned Manchester United PLC revenue exceeds its cost. The stock price does jump up and down but overall from one financial year to another it is increasing. It is in a position to pay a dividend. It is a business with a global appeal, higher than most including firms from both the world of sport and not. The club has many valuable assets such as their 76,000 seater stadium Old Trafford as well as a very talented playing staff with potentially high selling value. Due to the fact they are part of the Premier League and have signed many long-term sponsorships deals a certain level of revenue is guaranteed. On the other hand, potential investors of the club would need to accept constant public scrutiny as well as pressure to invest. The world of football is in a period where wages and transfer wages are rising exponentially. With the four most expensive transfers in football history happening in the last two years. (Independent 2018). While these are risks at any football club, Manchester United have more debt than any football club in Europe at £464 million. (Independent and UEFA). With only 0.47% of shares floated, even if one investor bought all the shares, they would have no say at the club. (Market Watch). Any takeover bid would likely be strongly resisted with revenue increasing each year. Realistically if someone wanted to take over the club, they would need to pay somewhere north of the market value of $3.14 billion reported by market watch due to intangible benefits such as publicity. Mike Ashley and his company Sports Direct with their ownership of Newcastle United is an excellent example of using a football club to improve the brand of another business. Any investor in Manchester United PLC would also need to take on all the debt of the club and have the constant pressure from millions of people to invest in the playing staff. It would be near impossible to make a profit. As a financial investment advisor, I would recommend both small and large investors not to invest in the stock of Manchester United PLC (MANU).
Reference List:
Daily Mail: http://www.dailymail.co.uk/sport/football/article-5301837/Alexis-Sanchez-goes-Premier-League-wage-table.html
Independent and UEFA https://www.independent.co.uk/news/manchester-united-debt-uefa-report-european-club-football-landscape-qpr-glazer-family-a7523761.html
Independent 2014 https://www.independent.ie/sport/soccer/10-most-expensive-footballers-in-history-36464026.html
Manchester United Annual Financial Report: http://ir.manutd.com/financial-information/annual-reports/2017.aspx
Manchester United Results: http://www.manutd.com/en/Fixtures-And-Results/United-Fixtures-And-Results.aspx?pageNo=1
Yahoo Finance Historical Data: https://finance.yahoo.com/quote/MANU/history?period1=1344553200&period2=1521417600&interval=1d&filter=history&frequency=1d
Biography
Blackwell Publishing: http://www.blackwellpublishing.com/content/GrantContemporaryStrategyAnalysis/6th_Edition/case_teaching_notes/CSA6CaseNotes_06.pdf
Figures and Graphs
Fig 1
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Fig 5
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