Victory in the Carabao Cup final on Sunday ended a five-season wait for a trophy at Manchester United. During that period, the clubs fans have had to watch Manchester City win England’s domestic league four times.
Two years ago, their crosstown rival surpassed United off the field as well, as its annual revenues exceeded those of Europe’s traditional financial superclub for the first time.
United are currently enjoying something of a renaissance on the pitch under a new coach, Dutchman Erik ten Hag. But its owners, the wealthy Glazer family, have nonetheless put it up for sale, with a reported target price of US$6 billion - US$7 billion ($9.7 billion - $11.3 billion) including debt that would shatter records for any sports team.
So far, only two bidders are known to have submitted a proposal, and such a valuation is hard to support by any conventional financial metric. Lex’s own calculations suggest the club is worth around US$1.6 billion ($2.6 billion) and even the current enterprise value of US$4.5 billion ($7.3 billion) implied by United’s share price would require unfeasibly high growth in revenue and profit to justify.
The fact that the Glazers, who were among the early foreign investors in top English football clubs when they bought United’s equity for £790 million ($1.5 million) in 2005, have chosen to sell up now adds to the sense that this may be the top of the market for such trophy assets.
But that ignores the potential for future growth across existing revenue streams and new ones such as non-fungible tokens and sports betting, and underestimates the scarcity value of a top global sporting franchise to billionaire bidders.
Clubs on the block
One likely catalyst for a transaction was the US$3.2 billion sale of Chelsea last May, a deal necessitated by the sanctions applied to its former owner Roman Abramovich following Russia’s invasion of Ukraine.
The takeover by US financier Todd Boehly and his partners prompted many owners to have a look at the potential value of their own clubs. In November, reports surfaced that Fenway Sports Group, a US brand owner whose portfolio also include the Boston Red Sox baseball team, was considering options for Liverpool. The company has subsequently said it does not intend to sell the Merseyside club.
Brothers Joel and Avram, two of the six children of the late Malcolm Glazer, announced later the same month that they would seek outside capital and possibly pursue a full sale of United.
The six control over 95 per cent of the club. Shareholders in an entity listed on the New York Stock Exchange since 2007 — its trading mnemonic is MANU — cover the small balance. The Glazers own two-thirds of the economic rights listed company but their shares carry 10 times the voting rights. No minority interest is going to derail a sale that has been agreed by the Glazers.
They have appointed Raine Group, the same merchant bank that handled the Chelsea transaction, to run the bidding process with initial bids now in.
Two potential buyers have publicly announced their interest: Sir Jim Ratcliffe, life-long Red Devils fan and billionaire owner of petrochemical producer Ineos, and Sheikh Jassim bin Hamad al-Thani, the son of Qatar’s former prime minister, and chair of Qatar Islamic Bank. He too claims life-long fanhood to United.
The Qatari state already owns French champions Paris Saint-Germain through Qatar Sports Investments. Uefa, the governing body for football in Europe, bars clubs owned by the same entity from competing against each other. However, Uefa made an exception in the case of clubs owned by Red Bull (Leipzig and Salzburg) who played each other in the Europa League tournament in 2018.
Ratcliffe, who is being advised by Goldman Sachs and JPMorgan, has pitched his overture as a fan-friendly bid while al-Thani is pledging a debt-free takeover — a nod to fans’ longstanding concerns about the high leverage of the Glazer era.
There is also the possibility of an investor taking a minority stake, or providing financing to support the current Glazer ownership. Elliott Management, the activist hedge fund has expressed an interest in providing financing for potential suitors, as have specialist financiers MSD Partners and Oaktree Capital.
Investment needed
United fans have long complained about the club’s high debt, low investment stewardship by the Glazers. Yet other financial and personal reasons probably encouraged the decision to explore a sale.
Old Trafford remains the biggest stadium in the Premier League with a capacity of 77,000 but it is no longer the most modern — Manchester City, Arsenal and Tottenham have all expanded their capacity and improved facilities in the 15 years since the so-called Theatre of Dreams last had a facelift.
Reports have put the potential cost of refurbishing Old Trafford and the club’s Carrington training complex — whose facilities were the subject of vocal criticism by now-departed star Cristiano Ronaldo — as high as £1.5 billion. Judging from their cash flow estimates, analysts had not anticipated such a large investment programme. In its last results report the club suspended dividend payments for this fiscal year (to June) purportedly to preserve cash flow.
One big plus is that United does own a substantial amount of land around the stadium. At a minimum, this straightforward ownership should offer further development potential to any buyer.
Revenue growth stalls
England’s Premier League is the most lucrative in Europe; its clubs make up over half of the wealthiest in Europe and their spending on player transfers routinely dwarfs that of rival leagues. Among global leagues, only the US National Football League exceeds its estimated US$7 billion of annual revenue.
As recently as the 2016-2017 season, United led all football clubs in sales income. But after more than a decade of rapid expansion, United’s payments from broadcast rights — its biggest source of revenue — and commercial income from sponsorship deals have both plateaued.
That is partly because of the effects of the Covid-19 pandemic which robbed all football teams of match day ticket revenue and some broadcast income for parts of two consecutive seasons. But the team’s erratic performance on the field has not helped. It failed to qualify for the lucrative pan-European Champions League competition in 2016 and 2019.
At €688 million, United’s annual revenue is still above the average of €462 million reported by Europe’s elite clubs in the season ending 2022, according to Deloitte data. It is also fairly resilient financially; even in a relatively poor season, when the club finished sixth in the league, revenue exceeded all other European clubs except City, Real Madrid and Liverpool.
Joining the Super League, a pan-European competition proposed in 2021 by some of Europe’s top clubs including United, could have brought added commercial and broadcast income. But football fans and many politicians across Europe reacted with horror to the proposals and the idea was quickly abandoned.
Meanwhile, operating costs, primarily player wages, keep going up. Even though the club has one of the lower wage to revenue ratios in the EPL at 66 per cent, the Red Devils still fell into a third consecutive pre-tax loss in the year to June 2022. That is the worst streak since the Glazers took control in 2005.
This sluggish financial performance could explain the Glazer’s desire to raise outside capital or sell the club. Net debt has also started rising again in recent years. Almost all the debt is denominated in dollars whereas much of its revenue is generated in sterling, which has fallen 15 per cent against the greenback since peaking in June of 2021.
What price for United?
Valuing this famous team and its brand will not be a typical spreadsheet exercise. Its New York-listed shares give an indication of market expectations. The club is trading at an enterprise value — equity market capitalisation plus net debt — of US$4.5 billion. That is well below the highest estimates for a sale price.
There are a number of ways to come up with a valuation, even if the scarcity value of a top football brand such as United adds a premium to its intrinsic worth.
Earnings multiples, using either after-tax profit or perhaps earnings before interest, tax, depreciation and amortisation (a proxy for cash flow), can offer a sense of how many years of profits are assumed in the purchase price.
United now trades at about 28 times its estimated ebitda for the year to June 2023, according to data from S&P Capital IQ. That is near the top of its 10-year range and while limited financial disclosure makes comparisons with other top clubs difficult, it is well above the ratings of Italy’s Juventus (7 times) or Germany’s Borussia Dortmund (4 times).
Another approach is a discounted cash flow analysis. This uses cash flow forecasts over a long period of time and applies a discount factor and other assumptions to generate a capital value in today’s money.
These models are very sensitive to even small changes in assumptions but even so, using some sensible growth expectations, Lex’s resulting valuation was very low at around US$1.6 billion.
The DCF technique can also be used to work back from the current market valuation of United and calculate what level of revenue and profit growth would be required to support it.
Using post-tax cash flow it is almost impossible to arrive at a valuation approaching United’s current market worth. Even using pre-tax numbers, to meet the current enterprise valuation would require revenue growth of 17 per cent compounded annually for a decade while costs (including player wages) are kept in check. Free cash flow would need to grow at a 38 per cent a year, a huge pace for a mature business whose revenue is at least partly dependent on the vagaries of sporting success.
Comparing United’s revenue to that of peers is the easiest and frankly most popular yardstick. Top-line data is available for the biggest clubs at least and tends not to be as volatile as earnings.
Chelsea’s sale last year was done at around five times its revenues for last season, using Deloitte’s data. US private equity group Red Bird paid Elliott Management around 4.5 times revenues for Italy’s AC Milan last year. But even using these multiples on United’s estimated revenues for the season ending in 2026 only brings the valuation to US$4.3 billion — still US$200 million behind the current enterprise value.
United’s share price, up by three-quarters since the Glazers announced they were mulling a sale, gives it a market value that is more than six times its annual revenue. Optimists believe this understates the worth of the club’s global fan base. United says it has 1.1 billion fans and Joe Ravitch, co-founder of Raine, says around half of that is in Asia.
“The interesting question to me is, how do you monetise that international fan base?” he adds.
Its social media following alone is 213 million according to sports data specialist Football Benchmark. Yet the current owners have struggled to squeeze more cash out of the club’s devotees; a planned increase in the cost of season tickets, announced this week, is the first in 11 years.
Dan Plumley, sports finance lecturer at Sheffield Hallam University, still sees an intrinsic value of its brand at no less than $4 billion on the basis of the size of its fan base and the potential for new digital revenue streams. Any bid should come above this level due to the uniqueness of the asset, he thinks.
“The digital footprint of the fan base adds to the valuation,” he adds. “New forms of broadcasting, and social media, these bring up [the premium].”
He points to the recent deal on non-fungible tokens for football players between Paris-based Sorare and the EPL, worth tens of millions of pounds annually, as evidence. Sorare also runs blockchain-based fantasy sports games.
Others point to the success of Fanatics as evidence of what is possible for United. The privately owned US sports merchandising group, which is expanding into non-fungible tokens and other digital property, is worth up to $31 billion — four times even the highest estimates of United’s value.
Against these high valuations, and the challenges of financing them, would come regulatory risk. In early February, the Premier League charged City and its Abu Dhabi owners with breaching dozens of financial rules in the decade through 2018. If the allegations are upheld by an independent commission, unlimited fines and sanctions such as points deductions or even forced relegation are possible.
The UK government is also preparing to issue a white paper on the regulation of the game that pledges to weed out unscrupulous owners, improve financial sustainability and give fans more of a voice.
The two may be connected; the Premier League’s move against City may be a belated attempt to show that the league can regulate itself without state interference. But both suggest there will be more scrutiny of the finances of football clubs in future.
Such overhangs are unlikely to deflect interest for long. United may yet fetch a high price from a single outright buyer who believes that markets have grossly underestimated the potential for sporting teams to extract even more money from the pockets of their devoted followers.
But applying conventional valuation techniques misses one vital but intangible factor: opportunities to own truly global sporting franchises are vanishingly rare. The final price for this storied club could well result from a game of chicken between ultra-wealthy rivals keen not to miss out on such a once-in-a-lifetime deal.
Written by: Alan Livsey
© Financial Times