Fool's Eye View

[ March 28, 2000 ]

Half time at Old Trafford

By Maynard Paton (TMFMayn)

Carburton Street, London -- Fresh from becoming the first £1b football club the other week, Manchester United (LSE: MNU) kicked out their half-time results this morning.

The days of considering Man Utd purely as a football club are long gone. Nowadays, Man Utd are a "content" provider for broadcasters with a fully blown licensing and merchandising operation to boot. Putting the ball in the back of the net is now geared towards increasing the revenues from the general media and the sale of replica shirts, rather than just to fill a trophy cabinet.

With football, and indeed sport in general, fast becoming the central plank in any media company's broadcasting schedule, and the escalating revenues from television, the players have wanted a piece of the action. Footballers' wage demands have blighted many a clubs' profit and loss account. Only Manchester United, with their huge worldwide fan club, have historically managed to sustain long-term profits.

So what of today's interims, detailing the six months to 31st January 2000?

Very commendably, with only 16 home matches compared to 20 last year, gate receipts came in at £21.4m compared to £22.4m. With the Old Trafford capacity raised to 67,000 for the 2000/01 season, a year ahead of schedule, there is still some headway to be made through future ticket sales. And with fewer home games, so conference and catering events suffered too, revenues declining £0.2m to £3.9m.

The real potential comes from sponsorship, television and merchandise. The final year of Man Utd's association with Sharp saw sponsorship revenues edge from £8.6m to £8.8m. In June, Vodafone AirTouch (LSE: VOD) will plaster their name across the Red Devils, in a deal worth £30m over four years. Television income soared 73% to £15.6m, the majority of this increase came from the revamped European Champions League. The rest came from Man Utd's entry in various other competitions, such as the rather ill-conceived World Club Championship. In terms of other media, nothing was mentioned about Man United's Internet ventures, while MUTV, without recent first-team highlights to show, is still a loss-maker.

And with a surprisingly good performance from the merchandise division, revenues rising 15% to £14.3m aided by a few extra franchise outlets around the UK and abroad, total turnover rose £7.5m to £64.0m.

However, in football, revenues mean nothing if it all falls into the players' hands. Man Utd were a little coy in their operating expenses commentary, describing player wages increasing by £3m. No actual staff costs were revealed this morning, but splitting the full 1999 £36.5m figure in half, we can assume player wagers rose by 16.4%. That outstrips the rate of additional turnover growth of 13%.

With four new players added to the squad, the amortisation of player contracts increased 28% to £6.5m in this first half. The amortisation charge is effectively another form of player cost, writing off the initial transfer fee over the life of the player's contract at Old Trafford. Which ever way you look at it, player costs ran ahead of sales in this six month period, and that's not good news.

At the end of the day, the interim operating profit was £12.1m (£10.6m), and interim earnings per share was 3.4p (3.0p).

At 400p, Man Utd stand on a "rolling" price-to-earnings (P/E) ratio of 63x. A few weeks ago, I tried to evaluate Man Utd's current £1b valuation using the following assumptions.

Revenue Source         10 year growth rate

Gate receipts                10%
Television                   30%
Sponsorship                  15%
Conference                   10%
Merchandise                  10%
Player Wages                 20%
Other Costs                  10%

Placing the anticipated profits of £133m on a P/E of 30 in 2009, gave Man Utd a £4b valuation, and a compound investment return of 15% over that time.

Nothing in these results have suggested that these assumptions are anything other than optimistic. Although gate receipts and merchandise performed well, television income only improved through a one-off alteration of the Champions League.

Until the bids are on the table for the Premier League broadcasting rights, up for renewal in 2001, and the effect of the new Vodafone deal is quantified, then determining the key drivers of Man Utd's future value is very much a matter of guesswork.

Great club, great company, great future. But with such buoyant assumptions needed to justify the current Man Utd valuation and player costs seeing no sign of abating, at the current heady valuation, the shares must be for the true fans only.

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Related Links

• Glory, Glory Man Utd
• Television -- Gateways and content
• Manchester United discussion board