Are Manchester United shares undervalued?

Dr James Fox takes a closer look at Manchester United shares after the owning Glazer family received new and improved offers for the football club.

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Manchester United (NYSE:MANU) shares slid on Monday after a new round of bidding for the Premiership football club came to an end.

ESPN reported that bids from Qatar’s Sheikh Jassim Bin Hamad Al Thani and British billionaire Sir Jim Ratcliffe have been increased from around $5.53bn, but remain below the asking price of around $7.4bn. Finnish entrepreneur Thomas Zilliacus is also among those bidding for the club.

This news resulted in the share price falling, with many investors unconvinced as to whether the club will actually be sold.

So is the club undervalued? Let’s take a look.

Model says ‘no’

One way of valuing a club is the Markham Multivariate Model, developed in 2013. It’s calculated like this.

Club value = (Revenue + Net Assets) x [(Net Profit + Revenue) ÷ Revenue] x (% stadium filled) / (%wage ratio)

The Markham valuation is far below the $7.4bn that the Glazer family want for the club. It suggests Manchester United is worth about £857m, based on its most recent full-year results.

It’s not just Manchester United. Liverpool FC is valued at £1.2bn, using the Markham metric. But that’s much less than the £4bn the owner Fenway Sports value it at.

Clearly, there is some discrepancy here. Why would Liverpool’s Markham valuation be higher than Manchester United’s, while the owning Glazer family want 50% more for their club than Liverpool’s owners. I can only put this down to brand value — and slightly higher ticket revenues in Manchester.

Perhaps the model, which was only developed 10 years ago, is outdated? Or maybe it doesn’t apply to elite level football. After all, sports clubs can be bought for reasons other than a pure commercial focus In such cases, the usual financial or valuation considerations are less important, and companies or nations may pay a premium to associate themselves with a club.

Why clubs could be worth more

Some analysts suggest another reason for the model’s lack of relevance is that English Premier League (EPL) clubs are poised for a period of much faster growth, with the value of broadcasting rights climbing relentlessly. TV revenue tripled over the last decade, from £1.7bn in the 2010-2013 period, to £5.1bn in 2016-2019.

But it’s not just TV revenues. United has a fan base of a billion people. This is huge, but some analysts claim the club hasn’t been successful in leveraging its fan base. United only generates around £600m in related revenue annually — around 60p per fan.

So there is definitely the argument that clubs could be worth more than the Markham model suggests.

However, there are certain risks in EPL football that don’t exist in America’s regulation-free leagues — where teams/franchises have much higher valuations. EPL clubs can lose a fortune in revenues by missing out on the Champions League inclusion, or being relegated.

So are Manchester United shares undervalued? They could well be, despite the market valuation being around $3bn higher than the Markham model suggests.

It’s because the EPL has huge growth potential and Manchester United has the capacity to further leverage its fan base to generate more revenue — this could become easier as developing nations grow wealthier.

Right now, I’d suggest several EPL clubs would be good buys, but only Manchester United is listed. The Saudi purchase of Newcastle now looks a steal at $408m.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Fox has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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