On Monday 16 October, Manchester United (NYSE:MANU) shares dropped 10.4%. This came after news a Qatari group was stepping back from a potential takeover bid for the business.
Even with this slump, it’s shares are still up 37% over the past year. Here’s why I’m not convinced the stock is a smart buy.
Chatter about a deal
The share price jumped significantly late last year as the process to sell the club got underway. The bidding process has taken a long time and, ultimately, still isn’t finished.
The fact the stock is still up over a 52-week period shows the optimism investors have that a deal can still be struck.
To some extent, I understand this optimism. If a deal is done, the enterprise as a whole should see the value increase significantly. This would be due to heavy investment in infrastructure (the stadium) as well as marketing channels (game day merchandise). As a result, this would help to boost revenue and overall brand image.
The share price would likely rally as it would mark the end of a management era from the current owners. There has been widespread criticism over the business strategy, so this cutting of ties would be seen as a positive fresh start.
Poor financials
One reason why I think Manchester United shares are still overvalued is due to the financials. Apart from 2019, the business has lost money for each of the past five years. It looks like it’ll lose money again in this financial year.
I can accept why investors buy the stock of a high-growth company that’s losing money. The aim is that it’ll reach a level whereby it can break-even and then generate a profit as it matures.
But Manchester United isn’t a growth stock. It’s a mature business that has the same working model as it always has. So I don’t see why any positive sentiment should be attached, based on the financial state of the business.
Parties far apart
When I look at the takeover options, I’m also left scratching my head. With the Qatari’s out, there are other potential buyers interested. The main one is British billionaire Jim Ratcliffe.
However, it’s rumoured that the existing majority shareholders want a deal of $7.3bn. This is more than double the current market-cap of the company ($3.26bn). So the parties seem very far apart for any chance of an imminent deal to be struck.
I understand that if something can be worked out, Manchester United shares could rocket higher in a matter of days. I believe that’s why the share price hasn’t fallen further in recent days. Yet I’m not in the business of buying a stock on the hope that a takeover deal goes through. It’s too risky.
Better options elsewhere
If a deal does happen, some investors will net a healthy profit. Yet I think the chances are slim, which is why I think the stock is overvalued at current levels.
Given the uncertainty, I think that investors can find better opportunities for long-term growth elsewhere.
