Sunday saw the big soccer game in Northern England: Manchester United vs. Liverpool FC (final result: 2-1). One of the biggest rivalries in the English Premier League. The “Red Devils” vs. “The Reds”. However not everybody in the stadium was dressed in red: A lot of Manchester United (“ManU”) supporters are currently wearing a green and gold (historic colors of the club) scarf instead to protest against the owners of the team, US billionaire Malcolm Glazer (#305 on the Forbes list) and his family.
Unlike the US, where pro sports is usually build as a franchising system, most European soccer organizations have started as clubs, i.e. groups of people that met to play soccer (or other sports). By today, clubs in many leagues have been converted into companies as well, some of them publicly listed.
One of the synonyms for those enterprise types of clubs is Manchester United. Being one of the most successful clubs in the game, it has also been one of the richest for many years.
The Glazers, who also own NFL team Tampa Bay Buccaneers, have obviously no personal interest in the sport of soccer, they bought the team as a pure capital investment. Manchester fans dislike that the clubs debt has been rising to 716.5 million Pounds ($ 1.1 billion) after the takeover, rising ticket prices and the unemotional way the club is managed, and claim that the owners were not respecting the the heritage of the club and the culture of the game.
A group of rich ManU supporters have teamed up (calling themselves the “Red Knights”) and are said to have raised 1.5 billion Pounds ($ 2.2 billion) for a takeover bid – that’s a few hundred million more than the Glazers paid just some years ago. A Glazer spokesman replied that there was no intention to sell the club.
If you were the Glazers, what would you do? And the question behind is: How to evaluate a soccer team (or a company in general)?
One way to evaluate potential investments is to compare the earnings of the company to the price that has to be paid to acquire the company. There are a couple of different ratios that can be applied. Some list the earning over the next years and discount them by using an interest rate or target yield. Others simply compare the price to the earnings in a certain year (usually the durrent or the one before). A classical ratio that follows this logic is to compare one year’s EBITDA (earnings before interest, taxes, depreciation and amortization) with the price to acquire the company. The idea is to compare the investment to other investment opportunities to determine which of them make sense and which don’t.
Applied to our example: In 2009, Manchester United had an EBITDA of 99 million Pounds. Based thereon the price offered (or not) by the red nights would be 15 times the earnings. That is very high (typical Enterprise Value/EBITDA ratios in Europe are in the range of 6 to 9).
In addition to that, a lot of the earnings in 2009 have been brought in by selling off players, notably superstar Christian Ronaldo, who has been replaced by less expensive players. Buying players cheap and selling them expensively is a business model that many teams follow, but it is based upon a very high risk as you never know what you get out of a player you buy (for more on that topic, please see my post on recruiting in the NFL). Therefore, I would personally exclude this from the evaluation of a team as it can’t always be duplicated and as the success is often linked to very few people that could leave the club quite easily. Excluding it makes the ratio look even worse.
Let’s look at the other typical income streams of a soccer organization:
First, there is income directly linked to match days. This is mainly coming from entrance fees, catering at the stadium, etc. Ticket prices have just been boosted by ManU and seem to have reach some kind of limit. The cup performance and the stadium capacity utilization have already been good in recent years. All in all there does not seem to be a huge upside potential in this area.
Second, there is all media related revenue. ManU plays in one of the strongest leagues when it comes to media revenue. Good contracts have been concluded by the English Premier League, not only domestically, but also abroad. A lot of the media revenue is based on Pay TV, a model that is coming under heavy pressure from free (mostly illegal) streaming on the internet. The situation reminds me a bit of the music industry a few years ago, and their revenues did not really go up recently. Therefore I don’t see a big upward potential in this area either.
The only remaining area is the exploitation of the brand e.g. by sponsorship deal or by means of merchandising. Here, ManU is already one of the strongest performers. However, this is the only area where there may be some upside potential through more revenues from overseas markets like in the US or Asia.
The Manchester United brand is easily associated with the color red, so when supporters start wearing green and gold instead they attack the strength of the brand. Obviously the ManU organization is nervous about it: Last week, they fired a worker because he was wearing a green and gold scarf.
The Glazers feel that they own the best brand in the business, but brands are a lot easier to destroy than to build. The ManU brand is build on tradition and past successes. Ignoring that is simply destroying brand value. I have no glass ball and I can’t tell the future, but my feeling and the result of the analysis I just came up with is that for the Glazers there won’t be many better offers coming in the future.
Yes, ManU will probably earn money year by year (which also always is at risk in a business like soccer – many examples have shown that), but given the size of the earnings the investment is just too high. Put differently: If you invest you money elsewhere, you will probably earn more.
I’m sure the Glazers know all this. To me it seems like there are just three possibilities:
a) The Glazers have a reasoning different from mine.
b) There simply is no offer to sell in the size of the amount rumored.
c) The Glazers keep the club just because of their own personal vanity.
What do you think. And what would you do if you were the Glazers?