This week's casual valuation is Manchester United, one of the biggest football (soccer) clubs in the world, and a public company trading on NYSE.
As always, this post is not financial/investment advice, it is purely for educational/entertainment purposes. It is divided into quite some segments and I hope you enjoy it! Let's get started:
How does Manchester United make money?
In the last twelve months (ending June 2022), the total revenue was £583m and is divided into 4 segments:
- Broadcasting (37%) – TV rights & MANU TV (a monthly subscription offering for the fans in exchange for exclusive content)
- Sponsorships (25%) – self-explanatory, related to the main sponsor, but also all the advertisements around the pitch
- Matchday (19%) – Sale of tickets
- Retail, merchandising, apparel (19%) – Sale of branded clothing
It is quite clear that the last 2 segments depend on the fans and whether they are willing to support the club or not. If we add the MANU TV portion on top, it is quite clear that the fans contribute at least 40% of the total revenue and are significant stakeholders. Therefore, they have every right to demand changes when it comes to the players/managers or even owners, as they keep the club alive to some extent.
How does Manchester United spend money?
Looking at the income statement for the same period, all of the expenses amounted to £692m, yes, higher than the revenue. We can divide this into 3 brackets:
- Employee benefits (55%) – Related to the salaries of the players, managers as well as all of the staff employed by the club
- Other operating expenses (23%) – One bucket where all the other expenses related to the operations are included
- Amortization (22%) – Related to the contracts of the players signed
Historical financial performance
From the information above, it is clear that the club isn't profitable. Was it always the case? Not really. If we go back to 2018, the revenue earned was quite similar, but the expenses were £564m, leading to a profit of £25m (4% operating margin). Wait, but that is quite a low margin, isn't it? Absolutely! But that should not come as a surprise. Sports clubs in general are not a great investment, and we will see some examples below.
However, this isn't a start-up that will improve margins over time as it scales up. We're looking at a club that's 100+ years old and struggles to be profitable. So, how can we value it?
Of course, if we plug the numbers into a DCF, well, the outcome is, it is worthless! It's not creating wealth! Not only that, it has £124m in cash and £806m in debt (including unearned revenue)!
The wishful thinking valuation
Let's perform a simple exercise, which I refer to as a wishful thinking valuation. In this scenario, the club's revenue increased by 40% (due to better and more lucrative sponsorship deals, higher apparel sales, more matches played in important competitions, etc). At the same time, the expenses are slightly lower, leading to an operating profit of around £150m.
In addition, let's also assume that the club is consistently successful in delivering this profitability over time. Are these unrealistic assumptions? Very likely.
Even in this case, the value of the football club is around £1,5b before adjusting for what's on their balance sheet. Once we do that, the value declines to roughly £800m. That's extremely low! In fact, that's about 45% of the company's market cap today (Keep in mind the company's share price is always in $ as it is trading on the NYSE, while the financial numbers are in £).
So, in the best-case scenario, under unrealistic assumptions, its value is under £1b.
Wait, that cannot be the case. This is one of the biggest clubs in the world with over 75m fans!
What's actually going wrong?
One of the fastest ways to become a millionaire is to become a billionaire and then buy a sports team.
It's not only Manchester United that struggles to find a way to profitability, but almost all of the clubs! Football Benchmark has an annual report and one segment focuses on profitability. It covers the top32 clubs. The outcome? Back in 2016, all of the 32 clubs had a net loss of €156m on €7,7b revenue (I know, it's in €, who needed a third currency in this post, but well, it is what it is). In 2022, the loss was almost €2,7b on almost €10b in revenue.
There are only a handful of clubs that are public. Juventus is one of them, with the share price being down over 75% since 2001, Borussia Dortmund is a bit better with the share price declining just almost 60% since 2000.
Manchester United's share price is pretty much flat since 2012.
Emotional stock-price volatility
There are many places where the emotions of human beings play and the stock market is definitely one of them. The share price of the football clubs also changes based on events that have overstated significance. Here are a few examples:
– During the 2013 transfer period, Manchester United announced the signing of the midfielder Fellaini and the share price increased.
– Manchester United's share price decreased over 9% on the speculation that the club might sign Ezequiel Garay.
It's not only Manchester United, take a look at the share price of Juventus, it went over 3x on the news of signing Ronaldo.
Don't get me wrong, these events have some (minor) impact on the success of the club during a short period of time. In the case of Ronaldo, it might even come with better sponsorship deals, higher ticket prices, and more apparel sales. However, it also comes with an additional cost (an obvious one, his salary!). In the long run, none of these events have an impact on the value of the clubs.
The transfer window
When I was in university, I looked at this and thought, what is the most emotional period during the year? It has to be the summer transfer window.
So, I took a shortcut and looked at the performance of the share price of Manchester United since 2013 for the period between June 10th and September 1st. The outcome?
| Manchester United | S&P500 | |
|---|---|---|
| 2013 | -1% | -1% |
| 2014 | -3% | 3% |
| 2015 | 7% | -6% |
| 2016 | -1% | 4% |
| 2017 | -1% | 2% |
| 2018 | 22% | 4% |
| 2019 | -4% | 1% |
| 2020 | -10% | 12% |
| 2021 | 11% | 7% |
| 2022 | 11% | 1% |
| Total compounded return | 32% | 29% |
As always, not financial advice, but definitely a fun insight.
Pricing, not valuation
In my opinion, this belongs in the “Pricing, not valuation” bucket. The same bucket as art, collectibles, watches, vintage cars, and the most expensive Pokemon Card. None of them produce cash flow, hence, applying the traditional financial models leads to the outcome that they are worthless.
Is that the case? Not really.
They're worth as much as the price that the next person is willing to pay. This is the only way that the current owners can actually make money.
Sports clubs seem like another toy/possession for billionaires as if they're going through a checklist.
An expensive car? Check
A yacht? Check
Private jet? Check
Seventeen properties? Check
Hmm, what else? Oh yeah, maybe a sports club!
Credit Suisse and their failed attempt to value Manchester United
Back in 2015, Credit Suisse published an equity report valuing Manchester United. I'm not sure if anyone is reviewing valuations there, as this one was based on irrational assumptions. The valuation lead to the value of Manchester United being £2,5b. Here's how:
- They assumed Manchester United will be profitable every single year in the future and the profits will increase over time. Comparing their forecasts to the actuals, they are quite far off. Not only that, but we already know the club is currently unprofitable.
- For the calculation of the terminal value, they used EBITDA and applied a multiple. If anyone read the first part of the post, you already know that this is just dumb. using EBITDA excludes amortization that covers the players' contracts! Of course, this pushes the profitability up without taking all expenses and voila, the valuation is done. Not only that, the multiple used was 12x.
Apologies if the post was too long, I wanted to share all the information that I thought are relevant and I hope you enjoyed it.
TLDR: Buying a sports club is a great way to become a millionaire if you are already a billionaire.
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