Manchester United As a Public Company
Sports, the world over, are an escape. They allow us to leave our everyday lives and watch a group of 20-somethings bash each other about for a few minutes, all in the name of a trophy or a cup or a bowl. They're a way for strangers to wear the same t-shirt and immediately bond over their hatred of that guy across the bar in a different color t-shirt. But they're also business, and business is booming. Today, I'm going to breakdown how professional sports franchises make as much money as they do by digging into the numbers of one of the few publicly traded sports teams in the world. It also happens to be one of the biggest by value, ranking 11th on Forbes list of the world's most valuable sports teams. This is a deep dive into Manchester United.
Top-Line Numbers:
2020 Full Year Revenue: $509.04 million (-18.83% YoY)
2020 Full Year Net Income: -$23.23 million (-223% YoY)
Q2 2021 Revenue: $118.29 million (-4.39% YoY)
Q2 2021 Net Income: -$18.11 million (+20.75% YoY)
How Did Manchester United Get Started?
This officially takes the mantel from Penn National Gaming as "oldest company I've ever covered." Founded as "Newton Heath LYR" in 1878, it was named for the railroad for which the original players worked. Eventually, the team changed its name to Manchester United in 1902, and founded its current stadium, Old Trafford (above) in 1910. Facing bankruptcy in 1902, four local businessmen bought the club for around 3,000 GPB (now equivalent to 290,000 GBP, or about $340,000) and the first ownership of the club was born. Since then, it has kept its place in the top division of English football, outside of a few seasons in the second tier, and has changed hands several times. The club found great success on the pitch in the 1960's, then again in the 1990's and 2000's. For our purposes, we're going to focus on the ownership change that occurred in 2005, when the Glazer family took control of the club in a leveraged buy out for $1.5 billion. As a result of the LBO, the debts the family took on in purchasing the club were transferred to the team, but more on that later.
What's The Business?
It's football, baby! Well, soccer, but you'll hear me refer to it as both, so keep up. In America, professional sports teams typically have three main forms of revenue:
TV rights deals
Sponsorships
Game-day revenue
With global soccer, however, there is a fourth: asset transfers, also known as "players." We'll cover all four of these pillars through the lens of Manchester United in the last couple of years. Just know that success on the field, usually translates to success off of it.
Will I Invest In Manchester United?
TV Rights
Let's cover TV rights deals first. Also known as "broadcasting rights," these contracts are incredibly lucrative, and are typically the main source of income for professional teams. Companies like ESPN, NBC, CBS, FOX, BBC and Sky all bid for the television broadcast rights of popular leagues, and that bidding process produces some sky high numbers. But why do the networks bid so much? Because they can sell the advertisements! Popular sports leagues and teams leads to an increased number of people watching your network. This, in turn, leads to more advertisers wanting to advertise in front of those people. Thanks to supply and demand, that drives the price of the advertising up, leading to more revenue generated for the network. That is why the price of the broadcasting rights is so high for leagues around the world, particularly the NFL and the Premier League. According to Forbes, the NFL just inked a deal that covers TV rights from 2023-2033, guaranteeing the league $10.3 billion per year, an 80% increase over the current rights deal. The NBA is second at $2.6 billion per year through the 2024-25 season on its current deal. The Premier League is third, dominating the global soccer landscape with a rights deal worth $2.18 billion per year. That has led to some skyrocketing valuations of the clubs within the Premier League, seeing teams like Liverpool and Manchester City's valuations increase over 100% in the last few years. Most leagues, including the NFL, NBA and PL, dole out this cash in even percentages among the teams that participate that season. Some however, like Spain's La Liga, dish out this money in a percentage-based system based on TV ratings. That is what has led to the overwhelming dominance of Real Madrid, Barcelona and Athletico Madrid over the past decade.
However, these ludicrous numbers don't seem to be enough for some owners, namely the American ones. Earlier in 2021, the Glazers of United, John Henry of Liverpool (and the Boston Red Socks), Stan Kroinke of Arsenal (and the LA Rams), Daniel Levy of Tottenham Hostpur and several other European powerhouses proposed and chartered the European Super League. Effectively, the ESL would have taken the existing Champions League European cup competition and created a new system similar to the domestic leagues. The upside of this for the teams was that it guaranteed higher TV revenues due to the "elite" nature of the competition. The participant teams were also guaranteed membership, because that's how they drew it up for themselves. The downside? It would effectively kill European club football and domestic competitions, marooning all of the smaller teams. And this wasn't just a fly-by-night idea. This was done. Contracts were written and signed, teams were preparing for the logistics of inclusion and there was even a $4 billion loan secured via JPMorgan. This was a done deal until fans stepped in to protest their teams' inclusion in the league. After the rapid backlash, the league disbanded within 48 hours.
Sponsorships and Game-day
The next area to cover is Sponsorship. In the NFL, there are very defined sponsorship rules. You can have partners for specific items, like insurance or pizza, but it has to be cleared by the league office since they have their own sponsors for the league as a whole. They also have a whole different set of sponsors for the Super Bowl. In the Premier League, that doesn't exist. Teams can run rampant with whatever partners they want. That's how Manchester United has ended up with an official tractor partner, official whiskey partner and official electric razor partner. Teams further down the table can get a little more creative with their sponsors. Wolverhampton Wanderers adopted Bitci.com, a cryptocurrency exchange, on their sleeves for this season.
You also have the main sponsors, which are the "kit sponsors." This consists of two parts: the kit/jersey manufacturer and the name sponsor on the actual shirt itself. For Manchester United, they signed a since-broken world record manufacturer deal with Adidas in 2019 which pays the club about $80 million per year over 10 years. In turn, Adidas keeps 93% of the revenue for shirt sales, with United keeping the other 7%. This number is significant, especially due to this week's report that the club re-signing Cristiano Ronaldo brought in $45.16 million in the first 24 hours.
The club also signed a new shirt sponsor heading into this season. The eight-year deal with General Motors and Chevrolet came to an end and paid the club over $500 million over the life of the deal. With the conclusion of that contract this year, United signed up software company TeamViewer on a new five-year deal that will see them paid around $275 million.
All of this feeds directly into the game-day revenue. The shirt sales, general merchandise, tickets and concessions all add up through the course of a season. in 2019, this accounted for about 18% of United's total yearly revenue. Of course, this revenue stream disappeared last year as a result of the pandemic, leading to many clubs being on the brink of default, hence the idea for the European Super League.
Asset Transfers
As I mentioned, this one is pretty unique to soccer. In the NFL, you could trade a player for draft picks or other players. In the NBA, same story, just a bit more complicated in the mechanisms to actually do it. In global soccer, players are actual assets to the club. They are bought and sold, not traded, and have dollar values affixed to them. The best case scenario for these teams in this situation is that a player is brought into the club as a young child for free and raised in the youth team, before becoming a big name and getting sold for a massive fee. This is how clubs like Southampton have operated for years. Many clubs, however, can thank transfer and player mismanagement as their downfall. The most famous recent example of a colossal fuck up is Barcelona. This summer, the sins of their previous transfer windows caught up to them. They paid far too much for big name players that didn't fit a system, and ended up collecting dust and getting paid big salaries. As a result, Barcelona is now over $1 billion in debt, and they were forced to cut ties with their greatest ever player, Lionel Messi, seeing him move to PSG in July.
Clubs can be made or broken on the backs of a few transfers. It's the leadership, similar to CEO's and capital allocation in a normal company, that determines the future success of the club.
Business Risks
Let's get back to Manchester United specifically. United is facing a few pretty unique risks that give me pause for thought. The first one is the ownership. The Glazer family is...unpopular among the fan-base at large. Even prior to the ESL formation, the Glazer family has been under intense scrutiny essentially since they took over the club. The biggest issue was the $600 million in debt carried over to the club as a result of the LBO, which immediately put unnecessary strain on the club's finances. The debt issue was papered over during the tenure of Alex Ferguson, due to the success on the pitch and the constant inflow of prize money. After his retirement, however, these issues came to the fore.
The finance issue doesn't end with the debt, however. The Glazers also instituted a dividend, paid out once per year to shareholders. While the dividend is many shareholders' reason to actually purchase, it's a point of contention with supporters of the club. They argue that the money would be better spent paying down the massive debt, signing higher-profile players (though that issue has been remedied recently) or restoring a stadium that hasn't seen a renovation since it was rebuilt after the bombings of World War II. Arguments around the dividend, crumbling infrastructure and several high-profile personnel misses have led fans to form organizations in protest of the ownership, boycotting the purchasing of new merchandise and adopting the yellow and green pan tones of Newton Heath in protest.
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Finally, as with any sports team, you have the specter of limited growth. The growth of a company is typically determined by the steps they take themselves: executives, products, mergers and acquisitions, etc. For sports teams, they are inherently dependent on the league they're in, and the growth of everyone around them, or none of them. I mentioned the TV rights at the top, and that seems like the best avenue to sustained growth, but it's not guaranteed. You have to ask the question: when are networks going to stop bidding up the rights for these leagues?
The Bottom Line
Investing in a professional sports team sounds fun in principle. If you're a really special kind of prick, you could walk around telling your buddies you "own a team." For some, this might be an emotional purchase; the chance to own a piece of your life with a tangible artifact. For investors, however, this one is a mixed bag. The TV rights and Sponsorship revenue can be appealing, but the lack of constant, consistent growth could be frustrating. With Manchester United in particular, the financial mismanagement is a struggle for me. There are rumors floating that, after the embarrassment of the ESL disaster earlier this year, the Glazers could be looking to sell and focus their attention on the Tampa Bay Buccaneers. If that happens, a temporary bump in shares could be seen, but I would never invest in a company based on it being an acquisition target. This one is too mixed for me, so it'll really come down to whether you think the growth is enough and the dividend will remain. If so, this could be a good purchase. If not, it's a stay away.
Short-term: Neutral
Long-term: Long
The following article is for entertainment purposes only. Please do not buy or sell a security based solely on what you read here. Please do your own research prior to trading. The author has a long position in Manchester United (NASDAQ: MANU).
