Manchester United's IPO Misses Wide Left
byAug 14th 2012 7:00AM
Manchester United (MANU) has an ardent fan base -- 75,000 cheering them on at every home game and millions more watching the action on TV.
But apparently there aren't a lot of soccer fans on Wall Street. When the club kicked off its initial public offering Friday, the excitement was muted, to say the least.
This is the first time in 14 years that a major sports team has been sold on the public market. Back then, the Cleveland Indians put up shares for sale, only to be taken private again a year later.
Taking Manchester United public was the Glazer family, which also owns the Tampa Bay Buccaneers. Half of the shares made available in the initial public offering were put up by the Glazers, who were clearly hoping for a big payday with an IPO at $16 to $20 a share. (That's a valuation of as much as $3.3 billion.)
But investor enthusiasm was anything but raucous, and Manchester United went public at a disappointing $14 per share.
Profits vs. Players
It's not the first big disappointment for the Glazers. The owners didn't make any fans in England when they bought Manchester United for $1.47 billion in 2005 and loaded it with $662 million of debt, hindering the club's ability to attract talent.
The conundrum of spending on talent isn't new for sports franchises and is one of the reasons sports teams don't go public very often. Fans want management to spend every penny possible on talent, which isn't the way a company piles up profits for its owners.
As a public company, you have to continue to grow profits for your stock to rise. Spending on free agents isn't the way to do that. The Boston Celtics and Cleveland Indians failed to be successes as public companies because the pull of fans and the pull of investors left management stuck in the middle with no way out.
Manchester United is already feeling the pinch. Profitability has tripled in the last three quarters, but revenue is expected to be down because the team was knocked out of the UEFA Champions League early this year. To remedy that, the team will need to spend more on players, again hurting profits.
If a sports team is highly profitable and successful, owners don't want agents and unions to know because they'll squeeze more out for the players, which is why disclosure of revenues and profits was such a contentious issue in the NFL's recent collective bargaining negotiation.
Sound Investment vs. Wall Street Novelty Item
What's interesting is that the financial history of sports franchises is not strong. The Los Angeles Dodgers just emerged from bankruptcy, while the Texas Rangers went bankrupt in 2010. The Pittsburgh Penguins have been bankrupt on multiple occasions. Even winning hasn't cured the financial ills of sports franchises, as the Rangers know.
Investors used to gobble up shares of sports teams when they hit the market. Fans around the world will buy a share or two, just to say they own a piece of the club, regardless of the team's financial soundness.
Last year the Packers capitalized on fans clamoring for a piece the action, selling them stock that is essentially worthless from a financial standpoint. (The Packers are, after all, a nonprofit organization. Sure, the share will look good framed on your wall, but owners can't even sell it to a third party without the team's right of first refusal.)
But times have changed, and the tepid investor reaction to Manchester's IPO isn't surprising considering the recent performance of other fan favorites in the past year.
Facebook (FB), Zynga (ZNGA), Groupon (GRPN), and Pandora (P) have all been flops as investments because they don't make enough money (or any money) to justify their rich valuations.
Although Manchester is profitable, it's in a similar boat as the preceding IPO freshman class. Last year, the soccer club made only $20.4 million from continuing operations, hardly an amount worthy of a $2.3 billion market cap, meaning value investors won't be donning soccer jerseys any time soon.
What's the best move for Manchester fans? You'll probably get more enjoyment from spending your hard-earned money on watching the team in the field than you would by buying the stock. History tells us that the disappointing IPO won't be the last time the club will disappoint investors.
Motley Fool contributor Travis Hoium does not have a position in any company mentioned. You can follow Travis on Twitter at @FlushDrawFool. The Motley Fool owns shares of Facebook. Motley Fool newsletter services have recommended buying shares of Facebook.