Brian Gaynor: Why Man U's rules are turning it into a loser

Old Trafford, Manchester. Photo / Supplied

Why is Manchester United's IPO generating so little investor interest and media attention?

Why is the company listing on the New York Stock Exchange when soccer has struggled in the United States?

Why are the club's 659 million worldwide fans not clamouring to buy its shares?

To answer these questions we have to look at several issues, including the company's financial structure and stock exchange rules and regulations.

Manchester United was established in 1878 by workers at the carriage and wagon department of the Newton Heath branch of the Lancashire and Yorkshire Railway.

Its original name was Newton Heath LYR Football Club, but this was changed to Manchester United in 1902 after the club narrowly avoided bankruptcy.

The company was listed on the London Stock Exchange in 1990 and eight years later received a £623 million takeover offer from Rupert Murdoch's BSkyB Corporation.

This was accepted by United's directors, but turned down by the Monopolies and Mergers Commission.

John Magnier and J.P. McManus, two wealthy Irish businessmen with extensive horse racing interests, then acquired a significant stake in the famous football club.

In 2001 and 2002 a horse called Rock of Gibraltar, which raced in the colours of Manchester United's manager Sir Alex Ferguson but was part-owned by Magnier, won a world record seven consecutive group one races in Ireland, England and France.

Magnier and Sir Alex became involved in an ugly dispute over the ownership of Rock of Gibraltar after the horse's racing career ended, and Magnier tried to have Sir Alex sacked as United's manager.

The club's board was appalled by this and decided to look for another investor to replace the two Irishmen.

That was when the United States Glazer family arrived on the scene.

The Glazers bought the Tampa Bay Buccaneers National Football League team in 1995 and Tampa Bay won its first Super Bowl in 2003.

The family started buying Manchester United shares a few weeks after that victory.

They continued to accumulate shares and in May 2005 bought Magnier and McManus' 28.7 per cent stake to bring their holding to 57 per cent.

From there, the Glazers quickly reached 75 per cent and Manchester United was delisted from the London Stock Exchange on June 22, 2005.

The remaining shares were compulsorily acquired a few months later and the club was valued at £800 million.

United's financial position has changed dramatically under the Glazers' stewardship, mainly because they borrowed against the club to fund their purchase.

This was a similar strategy to that of the Fay, Richwhite consortium when it bought Tranz Rail from the New Zealand government in the 1990s.

But the Glazers have got away with their reverse leverage because the club has taken advantage of the huge increase in television revenue, whereas New Zealand taxpayers have had to carry the can for Tranz Rail's poor performance.

Under the Glazers, Manchester United's long-term borrowings have gone from nothing to £416.7 million, even though £249.1 million of new equity was invested last financial year.

This helped reduce long-term borrowings, which had reached £753.9 million in June 2010.

The company's main tangible assets are property, especially the Old Trafford stadium, which was valued at £243.9 million at the end of March this year, up from £125.1 million in July 2004.

The two intangible assets in March were goodwill of £421.5 million and the club's players, who were valued at £99.4 million. In July 2004 the players were valued at £78.2 million and there was no goodwill.

Manchester United has traded at a loss during most of the Glazers' tenure, even though broadcasting revenue has gone from £62.5 million a year to £101.9 million in the year to last month.

The company has operated at a loss because of the crippling interest costs of the borrowing done to finance the Glazers' share purchases.

United had a small £5.3 million profit in its June 2009 year, but that was only after taking into account £80 million from the sale of Cristiano Ronaldo to Real Madrid.

United is listing on the New York Stock Exchange because the London, Hong Kong and Singapore exchanges would not accept its dual voting share structure.

Its New York listing also enables it to take advantage of America's Jumpstart Our Business Start-Ups Act, also known as the Jobs Act.

The Jobs Act exempts foreign emerging growth companies, with less than US$1 billion of revenue, from many stock exchange requirements, including the need to file quarterly reports, report material events, disclose executives' pay and file proxy statements.

As well, the Jobs Act does not require a majority of independent directors and the United board comprises two members of the Glazer family and two of the company's executives.

Manchester United has classified itself as an emerging growth company even though it is 134 years old and has annual revenue of £327.8 million.

The New Zealand Rugby Union generated revenue of $101.5 million last year.

The NZRU's remuneration costs, including players, was $50.6 million compared with Manchester United's £150 million ($294 million).

Soaring player compensation is a major problem for soccer club shareholders.

In the mid-1990s there were 27 listed UK soccer teams but most have disappointed shareholders because a higher and higher percentage of revenue is going to players.

Most of these teams have delisted, and only Arsenal and Birmingham City are still quoted on the London Stock Exchange.

Manchester United's IPO details are yet to be fully determined, but the club is expected to raise about US$100 million through the issue of new shares.

However, the Glazers will hold Class B shares, which will be entitled to 10 votes a share, whereas the public will be allocated Class A shares, which have one vote each.

This will enable the Glazers to maintain full control of the club.

Such dual-class shares are banned in most countries but are becoming increasingly common in the United States under its light-handed regulatory regime.

One study showed that 6 per cent of listed US companies have dual-class shares.

Among them are Facebook, Google, Groupon, LinkedIn, Ford and News Corp.

Another study shows that dual-class shares significantly underperformed the market, although Warren Buffett's Berkshire Hathaway is a notable exception to this.

One of the worst examples of dual-class shares was Hollinger International, in which chief executive Conrad Black owned 30 per cent of the shares but had 73 per cent of the voting rights.

Black stacked the board with his friends and then extracted huge management fees and consultant payments.

Manchester United's IPO is not attracting much attention because of its dual-class shares, disclosure exemptions under the Jobs Act, its Cayman Island base, the absence of any independent directors, the prospects of no dividend and the company's highly leveraged balance sheet.

Dual-class shares will come under the spotlight in New Zealand this year when the Fonterra Trading Among Farmers scheme comes to the market.

Fonterra's non-farmer units will have an equity risk and receive dividends but they will have no voting rights.

Thus, the Fonterra scheme will have some, but not all, of the characteristics of an American dual-class share structure. With this in mind these US listings are well worth studying as a benchmark for Fonterra, particularly as far as the post-listing performance of the dairy giant's units are concerned.

Brian Gaynor is an executive director of Milford Asset Management.