United's IPO: What does it mean? by @BusbyMUFC

I thought I would take a look at the registration statement filed by Manchester United with the United States Securities & Exchange Commission. Hopefully I can decipher some of it and clear certain things up. Mostly I wanted to form my own opinions & conclusions before reading what other, more knowledgeable, people might say. For example, @AndersRed seems to be well informed and very knowledgeable about financial matters and, in particular, relating to United. However, being that I pride myself on my intelligence and analytical skills I thought I’d have a look myself! Read more....



Just to re-iterate, I am a doctor and do NOT have any financial background in my education so please do not be offended if I misinterpret something or you simply do not agree. In the end I am here to generate original content that will prompt intelligent debate and ultimately I don’t know everything/do not have all the answers. However, I will do my best to piece as much of it together as possible. Most importantly, I’ll be doing it from the point of view of a United fan and what it might mean for the club.


The main thing that seems to have gotten twitter into a bit of a stir is the section on ‘Risk Factors’ and the term Indebtedness which appears over 40 times in the document. However, I won’t go into that part just yet. I want to look at the Initial Public Offering (IPO) itself first. I will address the other issues through the article.


What United have done is file a registration statement with the Securities and Exchange Commission to hold an initial public offering of stock and become a listed company on the New York Stock Exchange. The stock price & potential numbers of shares available have not been listed but the statement has said that the club are looking to raise $100m (approx £64m). This is an initial figure for the listing and it will certainly rise in the future. This will be dependent on the valuation of the club & the number of shares that are sold. The $100m figure is used to calculate potential listing fees etc. (as far as I understand it) as evidenced by this statement; “Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended”. In essence, an IPO of $100m is very small and would represent a small amount of the debt clearance. They will almost certainly look to reduce the debt significantly more with a higher eventual IPO.


As a note: All these dealings will be via a newly formed holding company (Manchester United Ltd.) based in the Caymen Islands.


There are a few things to address with this. By registering on the New York stock exchange the Glazers are able to sell different classes of shares (which is not allowed in the UK). In this IPO only ‘Class A’ shares will be issued. These have a voting power of one vote per share. The Glzaers will retain control the ‘Class B’ shares each of which has the power of 10 votes; thereby they essentially retain full control of the club. Importantly, they still retain control in the future should they sell any Class B shares as outlined by this: “Each Class B ordinary share shall be automatically and immediately converted into one Class A ordinary share upon any transfer thereof to a person or entity that is not an affiliate of the holder of such Class B ordinary share.” So if any Glazer owned share (Class B) is sold, it auto converts to a Class A share meaning they are able to retain control even if they sell more shares.


Additionally, they have made clear their intention NOT to pay cash dividends on the Class A shares. This effectively means that the only value of the shares is as a potential long term investment in anticipation of the club increasing in value. Therefore, profits will NOT be used to pay dividends to shareholders in the future. This is a good thing. It means that the shareholders will not be entitled to any of the club’s profits and would only be using the value of the shares as their sole investment opportunity. There are provisions written into the document for potential dividend payments but these are technicalities and essentially they are not going to pay dividends. Note: Having said that they have made clear that should any dividends be paid it would be equal between Class A & Class B shares.


“We intend to use all of our net proceeds from this offering to reduce our indebtedness.” This statement is perhaps the one that should be paid attention to the most. ALL proceeds from the IPO will be used to reduce our debt. The document, in my opinion, is a necessary public acknowledgement by the Glazers that the debt needs to be managed better. This is further supported by this statement  "As of March 31, 2012, we had total indebtedness of £423.3m. Our indebtedness increases the risk that we may be unable to generate cash sufficient to pay amounts due in respect of our indebtedness. It could also have effects on our business."


The total currently stands at £423.3m & with this IPO it can be reduced whatever amount is generated. Even $100m represents an OK chunk paid off in one go. It will undoubtedly be a higher sum & this can only be a good thing as it stands. This will, theoretically, reduce interest payments freeing up cash for investment into the team. Of course, the club’s budget already includes a certain sum set aside each year for transfers so with reduction in debt this should increase. The main thing is that none of the money generated by the IPO will be going directly to the Glazers pockets. Whatever happens, this IPO WILL reduce our debt. The amount, as mentioned earlier, is dependent on the eventual valuation, which in turn is dependent on demand.


The thing that seems to have caused quite a bit of anger etc. within United fan groups & on twitter is probably statements like the one two paragraphs above and like these which are included in the 22 page section marked ‘Risk Factors’:


The filing says "our indebtedness could adversely affect our financial health and competitive position" and reduce "the availability of our cash flow to fund the hiring and retention of players and coaching staff."


They also warn that that new UEFA spending restrictions "could negatively affect our business.”


These types of statements are understandably a cause for concern if taken out of context. However, within the same section the following statements have also been made:


 "Our operations can be subject to natural disasters and other events beyond our control, such as earthquakes, fires, power failures, telecommunication losses, terrorist attacks and acts of war. Such events, whether natural or manmade, could cause severe destruction or interruption to our operations, and as a result, our business could suffer serious harm. Our first team regularly tours the world for promotional matches, visiting various countries with a history of terrorism and civil unrest, and as a result, we and our players could be potential targets of terrorism when visiting such countries."


These are essentially worst case scenarios for the decline in our ability to generate revenue. Earthquakes are highly unlikely but have been included alongside terrorism etc. These are things beyond the control of the club but have to be included for legal reasons. Consequently the following statements have also been made:


 "There could be a decline in our popularity or the popularity of football."


We are more likely to see a black monarch in our lifetime than see the popularity of football decline in that same period. This is evidenced by the massive TV deals that have recently been signed by the PL which United will get a substantial share of as long as we remain competitive.


“It may not be possible to renew or replace key commercial agreements on similar or better terms, or attract new sponsors.”


This will be dependent on our popularity globally and competitiveness on the pitch. If United are to be believed we have increased our global reach MASSIVELY in the last 7 years and can now boast over 600m fans worldwide. This is unlikely to drop in the foreseeable future.


I could go on & address each individual Risk Factor laid out in the document but the take home message is that these are included as the Glazers are legally bound by the US stock exchange to include all WORST CASE SCENARIOS. So the panic and hatred that was seen on twitter was an over-reaction to certain statements taken out of context. In my opinion there is nothing NEW here to cause added concern.


What has largely been overlooked by the Twitteratti and the many articles from various media outlets is the growth that has been shown by United on a number of fronts. These have been very clearly laid out in the filing and represent quite encouraging reading if taken at face value. Obviously any figures have to be tempered by the debt but without it Manchester United is a company in rude health (examples below taken directly from the document). This is the part that will generate demand for the shares and ultimately determine the valuation. The Glazers are essentially showing that United are a business showing steady, and in some instances, massive financial growth which in turn means an increase in the valuation of the company is almost ‘guaranteed’. This is the part in Dragon’s Den where you sell yourself to potential investors and create demand thereby increasing your valuation!

Sponsorship Revenue Growth:

Shirt Sponsors:

Increasing Popularity (Facebook Connections):

Number of Countries with MU Mobile Service:

Mobile Revenue Growth:

Obviously this is a great thing for us in the short term but long term it means that the Glazers are unlikely to want to sell anytime soon (in my opinion). The debt is being managed and United are making profit; this makes for happy owners. With the IPO, there will be less debt, increased revenues, higher profit and ultimately no reason for them to sell. Conversely, all of the above should mean higher investment in the team and hopefully continued success on the pitch. The fact that we have remained competitive despite a cost of $500m in debt repayments over the years is amazing for me; a huge testament to the abilities of Ferguson and the coaching staff over the years.


Which brings me to another point; the success of the club on the pitch has been in no small part down to Ferguson. This is probably where the biggest unknown risk lies in the foreseeable future. His successor has to be someone who can come in and continue bringing in trophies and success (which for investors equates to revenue & profits & a higher share value). The potential candidates are the topic of many a discussion and I won’t go into it here but to ensure that the club as a business continues to show growth the next appointment is the most important decision at United for the last 50 years.


Conclusions:


The two MAIN positives from this are the fact that the IPO has been totally earmarked for clearing the debt & the new shareholders will NOT be paid dividends so profit will not be affected. These are big positives in my opinion but again my lack of financial education may mean I’m interpreting things wrong. My faith in my logic tells me that actually my interpretation is correct, however!


In addition there is very little to panic about. There isn’t much new information in there that should cause panic and further hatred of the Glazers. I think the main thing is an admission that the debt is a problem and has the potential to affect our long term competitiveness. In short the debt is hampering us in the transfer market; which isn’t exactly ground breaking news and is nothing new. The admission and very public acknowledgement is in fact a good thing in my opinion. Whilst it doesn’t change anything dramatically the simple fact that they are admitting there is a problem (albeit the wording is as a POTENTIAL issue as opposed to a current one) is a tiny step towards a healthier club. The only thing that grates with me is the fact that it has taken approximately $500m worth of debt payments before this admission has taken place. This is, of course, the source of much chagrin with United fans but, again, it is not news to us and therefore shouldn't cause panic or new animosity.


In addition, Ferguson and Gill can no longer trumpet the line that the Glazers haven’t hampered the club and that the debt hasn’t influenced transfers. I expect more than a few journalists to be banned from Ferguson press conferences in the coming months as he faces questions about things that he may not want to get into. He can no longer use “no value” as the sole excuse for lack of perceived “big transfers” and will invariably receive, understandably, difficult questions from the more ambitious & aggressive members of the press (who haven’t already been banned!).


As an aside: to all the Glazer apologists (I’ve seen a number of articles defending them) who say that they have run it as a business and it’s common for large businesses to be in debt etc: Why would they want an IPO if the debt wasn’t an issue? This is why it’s a major step for United and the Glazers. My gut feeling is that if they are able to establish a good valuation they will begin to offload shares in the future although maintaining control with a view to cashing in at some point. In the process they will make more than a tidy profit and the club will once again be owned by shareholders (which may or may not be a good thing).


So overall this is a good thing in my opinion: Creating cash to pay off debt without creating shareholders demanding dividends is a great thing compared to our current situation. Obviously, this does not change the past and the massive amounts of money that has already been spent on debt repayments etc. and, of course, the debt will remain for some time; but it is a step in the right direction in my opinion.


Anyway, I know it’s a long article but it was a fucking 300 page monster of a document which I have tried to summarise into 5 pages! I hope this has been helpful for you guys; it certainly was for me. If you have anything to add or if you have found any errors in my interpretation then please do get in touch. As I have said, I’m no expert so I would appreciate feedback.