Summary
Manchester United's potential sale could offer significant upside for investors, with Qatari banker Sheikh Jassim bin Hamad al-Thani's rumored offer valuing the club at around $5.25 billion.
INEOS founder Sir James Ratcliffe is also a contender, with his bid valuing the club between $6.2 and $6.8 billion, though he is only looking to acquire just over 50% of the club.
While there are risks involved, the potential upside for investors outweighs the short-term risks, with a successful sale possibly doubling their investment.
Manchester United's Old Trafford stadium P. Kijsanayothin
Manchester United plc $Manchester United PLC(MANU)$ is one of the best known names in global football ("soccer" to Americans). On the pitch, the team's performance has been lagging as of late. Since 2013 they were not able to crown themselves national champions. The last European title dates to 2017 when the club won the UEFA Europa League. The last triumph in the more prestigious (and more financially lucrative) Champions League even to 2008. That notwithstanding, the Manchester United brand remains exceptionally valuable not only in England, but even more so abroad, particularly in Asia.
For minority shareholders, the stock has been a rather mixed story since its IPO a little over a decade ago. Late last year, however, a potential catalyst was announced: The late Malcolm Glazer's heirs are exploring "strategic alternatives" (in other words: a sale or partial sale of their stake). There are two serious contenders. The likelihood of one of the bids succeeding appears overwhelmingly likely in my view. Below, I am exploring the upside and/or downside potential a deal could represent from an investment point of view.
The Bidders
First, one should take a closer look at the bidders.
Sheikh Jassim al-Thani
The first bidder is Qatari banker Sheikh Jassim bin Hamad al-Thani. His offer is rumored to be around GBP5.5 billion (= $6.8 billion). That figure, however, refers not to a pure equity valuation, but to the enterprise value (potentially including cash) plus a fund for "investment in the community" (which is essentially a PR play aimed at club fans, as both would not benefit existing shareholders). Manchester United reported total debt of $1.3 billion (net debt: $ 641m) in fiscal Q2 (ending December 31st). My understanding is that cash and equivalents would be included, so the actual offer to shareholders comes closer to around $5.5 billion minus the value of the community fund. I speculate that the fund (being a PR play) could come in at GPP100m (a nice, round number and in Sterling, as the core fan base is British after all), which translates to just shy of $125m. To add a certain margin of safety, I will calculate with twice that figure. Hence, the total equity valuation could be around $5.25million. Coming from a current market capitalization of around $3 billion, that translates to about 75 percent upside in the event of a sale to Sheikh Jassim.
As a son of former Qatari prime minister Hamad bin Jassim bin Jaber al-Thani and an (albeit somewhat distant) cousin of the Emir, the English Premier League's owners' test might be an obstacle. While I believe such problems to be unlikely to occur in practice, it is a factor to bear in mind.
Sir James Ratcliffe
The second bidder is INEOS founder Sir James Ratcliffe (the deal may or may not be conducted through INEOS). The transaction would reportedly value the company as a whole at around GPB5 billion to GPB5.5 billion (= $6.2 to $6.8 billion). Unlike Sheikh Jassim, Sir James is believed to have offered to buy only slightly above 50 percent from the Glazers, while family members would (at least initially) continue to own a combined stake of about 20 percent.
Since that would mean, that non-family shareholders would not have the option to sell to the new majority owner, in this scenario it would be important to know which direction the club would take under Sir James' control.
One possibility is, that Sir James could be a fan first and foremost. For investors - who, ultimately, are in it for profit, not for success on the pitch - that would be bad news.
On the other hand, I assume that a Ratcliffe/INEOS takeover would at least in part be financed by credit. That would create the necessity to make the club work financially (putting the debt on the company itself is not a viable option as long as there are third party shareholders). Nonetheless, the share price may well take an initial downturn, if Sir James' bid were to prevail. I assume that the likely lower bound would be around $11 to $13 (the levels the stock traded at before the announcement of the Glazers' intention to explore strategic alternatives). Long term, however, it is not unlikely, that Sir James would eventually aim to acquire the remaining shares either through a tender offer or via at the market purchases. This would lead to possible future upside for shareholders.
Notably, the fact that no preferred bidder has been officially announced so far could be a sign of the Glazers preferring the Ratcliffe bid. Given their low approval ratings with fans, they may be deliberately waiting until after the season - which concluded June 3rd with the FA Cup final against local rivals Manchester City FC - in order to prevent visible fan backlash against their continued (minority) ownership.
One obstacle may be, that INEOS already own French side OCG Nice. This could theoretically result in conflicts with UEFA regulation baring a single owner from owning more than one team competing in European competitions. On the other hand, if the bid were to clear, the Nice connection may prove advantageous as OCG may effectively serve as a farm team going forward.
Other Possibilities
There is, of course, also the possibility that no deal comes to pass or that instead a private equity investor will take a minority stake. In that case, I see a high likelihood of the stock price reverting back to around $11 to $13 as before the announcement of the Glazers' intention to explore strategic alternatives. What a hypothetical private equity investment would mean for the company's valuation, naturally, would have to be assessed based on concrete terms if and once it becomes relevant.
Don't Overestimate The Time Factor
A common concern among experts is that, the sale process may drag on through the crucial summer transfer period, resulting in a lack of new signings and subsequent impairment of the team's sporting performance. Naturally, that would not matter in the event of a full takeover.
But even if there is only a partial sale or no deal at all, I think that shareholders would not be impacted too much by the absence of big ticket transfers. A successful transfer period is not that important business-wise (remember: there is a mid-season transfer period in January). Sure, without new signings, Manchester United is unlikely to play a role in next season's title race. But from a financial point of view, titles - while they would certainly not hurt - are not a necessity.
One half of media rights revenue is split equally among all twenty teams. 25 percent is distributed as a facilities fee for televised matches (with a fixed minimum per team) - Manchester United with its large fan base will always draw outsized interest whether fighting for the title or against relegation. Only a quarter is distributed on a merit base.
Another important source of revenue is the UEFA Champions League for which the team has qualified as Premier League third.
The group stage alone guarantees a fixed €15.25m (currently $16.3m) with an €0.9m (currently about $0.96m) per point (3 points per victory, 1 point per draw).
Every additional stage is worth another €10m to €12m with teams reaching the final receiving a fixed €15m. The winner receives an additional €7.5m (€3.5m of which is the match premium for the UEFA Supercup) plus the chance to win another €1m if they win the Supercup. Additionally, there are payments based on the UEFA club coefficients rankings (which depend on the performance of a team as well as its opponents and other teams from the same country).
For EPL teams, fourth place will suffice for qualification (fifth if either the Champions League or the lower tier Europa League is won by an English team; sixth if both are won by English teams). Commercial and matchday revenue, meanwhile, do not directly depend on on-pitch performance (at least not in the short term).
On the flip side, no transfers (a world class striker may easily cost in excess of $100 million - and that is excluding salary) mean less cash outflows. This, in turn, is generally a positive from a shareholder point of view. Even if the result would be a disappointing Champions League performance, the (NET) financial impact would be minuscule (if not even slightly positive), as long as fans continue to show up on match days (which I absolutely expect them to, given the emotional bond with the club), From a purely financial point of view, it makes no difference whether someone buys a ticket to have a good time or to protest the club owners.
Conclusion
From investors' point of view, a full takeover as proposed by Sheikh Jassim al-Thani offers the most immediate upside. If the Qatari bid succeeds, I think investors have the opportunity to double their money based on the current share price.
This investment certainly is not without risk. In the worst case, I can see 30 to 40 percent downside in the short term. Medium to long term, however, even then, at least break-even is not unlikely. Investments in major real estate improvements (the Old Trafford stadium in particular) as well as sporting performance would be likely to create long term value. Whether Sir James Ratcliffe/INEOS (much more likely in my view) or private equity would be the party contributing funds is of second tier importance in that regard. Sir James is also likely to pursue full control eventually. This may very well translate to a tender offer and/or at the market purchases in a few years' time.
All in all, I believe that the potential upside outweighs the short term risks of an investment.
Source: Seeking Alpha
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