Fool's Eye View

[ March 9, 2000 ]

Glory, Glory Man Utd

By Maynard Paton (TMFMayn)

Carburton Street, London -- After Manchester United (LSE: MNU) became the world's first football club to break the £1b barrier yesterday, to much acclaim from the general media, you could be excused for thinking that their share price has gone just a little crazy. It certainly has been "Glory, glory, Man Utd" on the stock market in the last few days.

But as most people are aware, from an investment perspective, Man Utd isn't just about eleven men kicking a ball into a net. It's all about Man Utd and the media, and the Man Utd brand .As I wrote in a Qualiport feature back in December, Man Utd have a few key long-term investment attributes.

• Proprietorial ownership of their television rights. The never-ending popularity of football means there is a long-term attraction, from any television broadcaster's perspective, to televising Man Utd's on-pitch performances.
• The world-famous brand. The global familiarity of the Man Utd name has almost infinite spin-off opportunities.
• Tremendous customer loyalty. Man Utd supporters are unlikely to change their allegiance from supporting the club, giving a very predictable vision of future profits.
• No new competitors. It's unlikely a new sport will diminish football's popularity in the near future, nor is there a queue of football "startups" waiting in the wings.

As a global brand, and an owner of televisual content, there are few better than Man Utd. Vodafone AirTouch (LSE: VOD) has realised this, beating off several other multinationals to pay United £30m over four years in a shirt sponsorship deal. Man Utd appears to have a very bright future, with the commitment from its customers, having relatively few serious competitors, and having sponsors and broadcasters queuing up to wave large cheques under its nose.

Of course, there is always the downside. Not least, can Man Utd maintain the current on-pitch success that attracts all the big television and sponsorship money? What will happen when the team's manager Sir Alex Ferguson departs the club? Will the star players then desert Old Trafford? You only have to look at the team of the 1980s, Liverpool FC, and how they fared after a change of management leading into the 1990s. And will Man Utd have to buy top players in the future, rather than develop the next Giggs or Beckham on the cheap through their youth schemes?

I also suspect that a significant proportion of Man Utd fans are "glory seekers", picking the Red Devils as their favourite team because of the past decade of success. Would they be so fanatical if their team hit a prolonged losing streak? And most importantly, all the extra income from television -- won't it just fall into the pockets of the players anyway, rather than into the club's coffers? Certainly an eye has to be kept on player wage hyper-inflation.

Putting some of my rather disparaging thoughts aside, and ignoring valuation for the time being, Man Utd is fundamentally a sound long term investment.

But is Man Utd worth a billion pounds?

For the year ended 31st July 1999, Man Utd made a post-tax profit of £15.34m. At 402p, equating to a market capitalisation of £1,044m, the shares sit on a profits multiple of 68. Certainly, there is some expectation of future profits in today's share price. Trying to determine whether Man Utd is worth a billion needs a clear long-term vision of its financial future. Let's say you're a committed fan and will hold for 10 years, and require a 15% annual average return on your investment over this period. In other words, you'll expect to see Man Utd valued at £4b in 2010. How rosy does the Man Utd future have to be in order to arrive at this target?

Man Utd have five streams of income. Here's how their revenues have been generated in the past.

Source          1996    1997    1998     1999 
               (£000)  (£000)  (£000)   (£000) 
 
Gate Receipts  19,588  30,111  29,778  41,908 
Television      5,709  12,588  16,203  22,503 
Sponsorship     5,841  11,080  11,771  17,488 
Conference      3,517   5,479   6,046   7,189 
Merchandise    18,661  28,681  24,077  21,586 
Total          53,316  87,939  87,875 110,634 

Notice how income from television and sponsorship has dramatically risen in the last few years. Both have tripled in size. Notice also the surprising drop in merchandise sales. I assume you can only own so many different Man Utd replica shirts.

So let me put my finger in the air and extrapolate revenues years into the future. For revenues generated from match day attendances, corporate events and merchandise sales, I'll assume 10% annual growth. The club can't fleece the fans for their tickets forever, but I'm assuming the extra merchandise sold worldwide, a few additional seats at the Stretford End and more corporate events on non-match days should help things tick along. I have to say that this 10% rate may be very optimistic.

Now, the important guesswork lies in judging a suitable compound growth rate for television and sponsorship. I'll go for 30% annual television growth, and 15% annual sponsorship growth. Again, a little racy, perhaps?

So here's how revenues could look in 2010 at Old Trafford, given the above estimates.

Source              2010 
                   (£000) 
 
Gate Receipts     108,699 
Television        310,223 
Sponsorship        70,749 
Conference         18,646 
Merchandise        55,989 
Total             564,304 

A five-fold increase in turnover over the next decade. Nice.

But what about the player costs and profits? If the money keeps coming in from British Sky Broadcasting (LSE: BSY) and the like, then Keane and company will continue to want their share. Total staff costs, of which I assume the majority is dished out to the players, have risen from £13.3m to £36.5m in the four years to 1999.

And if I include the amortisation of players' contracts as well, a form of pseudo-player wages, another £10.2m is added to give a 1999 payroll cost of £46.7m. How about 20% annual wage inflation at Man Utd for the next ten years? The 20% is a bit understated I think, but it produces a staggering overall wage bill of £289m in 2010!

Another assumption I'm going to make is that the associated costs of television and sponsorship income are zero. This income, in theory, will increase each year and go straight into the bottom line. This means that all the costs apart from the wage bill relate to the other sources of income, the gate receipts and so on. So, for 1999, these operating expenses less staff costs came to £41.8m. So, I'll assume all these charges will increase in line with the revenue growth of the merchandise and so on (10%), to arrive at £82.1m in 2010.

From all this, I can deduce my 2010 operating profit forecast.

                             2010 
                            (£000) 
 
Gate Receipts             108,699 
Television                310,223 
Sponsorship                70,749 
Conference                 18,646 
Merchandise                55,989 
 
Staff Costs              (289,241) 
Other costs               (82,092) 
                         --------- 
Operating Profit          192,972 

Tax these profits at 31% and I arrive at earnings of £133m. And now I'm going to make the rash assumption that Man Utd will stand on a price to earnings (P/E) ratio of "only" 30 in 2010. This gives a Man Utd price tag of, would you believe, £4b. How convenient!

I think I've made quite a few buoyant assumptions for the future of Man Utd. Will they all come to pass? As long as they do "the business" on the pitch, I guess the television and sponsorship money will continue to keep rolling in. But at my cheerful rates of growth? I'm not sure, but certainly, the business "franchise" characteristics mentioned earlier do give some backing to the very long timescale used.

But I suspect my extrapolations and estimates will prove a little optimistic in the course of time. To get any worthwhile investment return, a purchase of Man Utd at £1b requires a very healthy vision of their future. But then again, I thought Rupert Murdoch was overpaying when BSkyB launched a £625m bid for Man Utd a year or two ago. Like football, investing is a funny old game.

Any comments on this feature can be directed to the Manchester United discussion board.

Related Links
• Television -- Gateways and Content
• Fool's Eye View discussion board