8/10/2012
By David Urani, Research Analyst

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I'm a soccer fan, so today's IPO of Manchester United (MANU) makes me cringe because, for lack of a better word, I hate this team. Yet, having looked at the circumstances I might be cheering soon because this stock could be the latest hyped-up IPO to take a disappointing dive (if it dives like its players it will be whining and over-theatrical).

Today's $14 debut values it at around $2.3 billion, one of the most valuable sports teams in the world. It'll raise about $233 million from the stock sale, and retain $110 million after fees, commissions and other expenses.

Pros

Sweet Sponsorship deal – Courtesy of you the taxpayer because funny enough, as announced last week, Man U's biggest sponsor will be GM (which of course the government still holds a stake in) who will be on the club's jersey starting in 2014, with payments starting this year. The payment in 2014 will be $70 million for the season, more than double MANU's current sponsor deal, and that was seemingly bone-headed enough that GM's marketing chief was already axed as a direct result. Nevertheless, it's an improved sponsorship deal that will bring in extra revenue; the full deal is worth $559 million.

Consistency – Unlike the NFL or other American sports teams, Premier League clubs are unrestricted on how much they can invest, and the top clubs tend to stay at the top year after year. Like a rat infestation or an unsightly mole, this team will not go away, and has been one of the top three teams every season since 1991. It's not likely to be losing fans anytime soon.

Huge Fan Base – This is one of the most popular sports teams in the world, if not the very most popular; it claims has 659 million fans (I think this is probably a big exaggeration, however). They are likely to tap further into their Asian fan base with the recent acquisition of Japanese star Kagawa.

Cons

Old Coach – Actually, Sir Alex Ferguson might be the main reason for the team's success and he is widely regarded as the best manager of all time. But nowadays he's 70 years old. Surely the team will continue to be a top performer while he stays around, but this guy is irreplaceable and you have to wonder how long they can stay on top when he decides to retire, which you'd have to think would be within the next 5 years.

No Votes for You – The owning family of the team, the Glazers, will retain 99% of the voting rights of the company meaning shareholders will have little say on any decisions it makes. They also have no intention to pay dividends, although the owners still take out dividends for themselves.

Billionaire Competition – Big money has been buying up competing soccer teams lately, including Manchester United's neighboring team Manchester City which is now owned by Abu Dhabi Sheikh Mansour and won the league title this year. There is also the likes of Chelsea, owned by Russian oil tycoon Roman Abramovich, and the French league's PSG, recently taken over by Qatari billionaires. What this means is that not only is the sporting competition heating up, but other teams are willing to pay obscene amounts of cash to buy the best players. It's looking like it will cost more and more for Man U to acquire and retain talent.

Unpredictability – Sports are inherently unpredictable. While Man U has been able to stay on top of the league for the past 20 years, there are still other factors that keep it from being a sure deal. For instance, total revenue for the fiscal year ended June 30 is estimated to have fallen by 3-5% from the previous year because it got knocked out early in the Champions League tournament. In a way, given the club's success over the past couple of decades it has little direction to go but down, especially considering the aforementioned influx of new billionaire teams and the aging Alex Ferguson.

Debt – As of June 30, it had about $680 million of debt versus just $109 million of cash. All of the IPO cash is expected to be used for debt pay-down.

Transparency – Earlier this year, the JOBS act sought to make it easier for growing companies to go public, and one of the benefits is that they have relaxed reporting requirements. In fact, this may have been one of the reasons MANU decided to trade on the American market. If you're looking for fleshed-out earnings statements and deep insight into the company's operations, you're not likely to find it.

Valuation – The most important reason why the stock is likely to run into trouble. It's tough to get a proper price/earnings figure on the stock but at the previous $16-18 price range Bloomberg estimated it to be 50x; at today's $14 price it would still be above 30x and that's a huge premium. It is also worth roughly 5 times expected sales. As a comparison, Apple trades at 3.9x sales; Apple is expected to grow revenue by 44% this year. MANU is running around 11% revenue growth, quite average and not reflective of a premium priced stock.

The valuation of this stock alone makes it look an awful lot another over-hyped IPO that has too much expectation to live up to, and its growth thus far is simply not all that impressive. Add to that a number of various other factors that make this company inherently unpredictable (heck, if Wayne Rooney alone gets hurt there could be big problems) and it looks like a risky investment. Booooo.

For traders, as of this afternoon MANU shares are flat-lining against the $14 IPO price. Remember, it's customary for the underwriters to put a floor on the stock at the offering price on the day of the IPO, which almost makes today's price look like a tradable arbitrage to short sell (the same thing happened to Facebook which was held at its IPO price and then proceeded to plunge the following day).

David Urani
Wall Street Strategies