5th January 2024


5th January 2024

Following 13 months of ‘who, what, when, when, when…’ Sir Jim Ratcliffe and his INEOS business finally gets a deal over the line with the Glazer family to acquire 25% of Manchester United for £1.25bn. He also gets almost 100% of the problems to sort out and resolve. Lucky Jim….

So, how has it come to this? The fundamental problem is that the club has, in our view, adopted inferior strategies, priorities, and actions over recent years. The inevitable outcome of these failures is that both its internal financial performance and the results for shareholders have been poor, leading to a business which is in a worrying condition hence the apparent sale and/or search for investment which commenced in November 2022.

This state of affairs is a result of poor management and poor judgement. For example, in our considered opinion the business is measuring its own performance using incorrect metrics. As a result, this significant error is driving current strategies, priorities, and actions in the wrong direction. Consequently, it has also driven the club into severe financial difficulties…

The club’s favoured measure is ‘Adjusted EBITDA’ (EBITDA – Earning Before Interest, Tax, Depreciation and Amortisation). This metric shows that the business has made a positive cumulative EBITDA total of £1.34bn between 2015-23.

Therefore, this measure is telling the powers that be who run and own Manchester United that the club is doing well, it is profitable and there is nothing to change.

We, of course, recommend that the correct measure to use is that of Economic Profit as it contains all the costs of doing business including the required return to shareholders. It is a measure that does not hide or omit any form of cost and as such illustrates the economic reality. And as you might have guessed, it does show a very different picture than that of Adjusted EBITDA.

Over the same period (2015-23) the cumulative economic losses amount to £0.54bn. Therefore, this measure is telling the powers that be that the business is unprofitable, and things are not only getting worse but at a rapid rate too. It is a business that requires immediate repair!

And then there is the debt pile. There is plenty of coverage regarding the use of debt and the extent of the debt in which the club finds itself. A consistently poor and declining economic profit performance has resulted in increasing levels of debt in order to keep the business afloat. Alongside this one-way traffic is a worrying decline in cash. Unless addressed, sooner or later, this combination of too much debt and not enough cash will result in a corporate downfall which will overwhelm the club both suddenly and completely.

Thus, the combination of increasing debt, diminishing cash and troubling economic performance brings about three key questions:

  1. What does the future hold?
  2. What should the Board do?
  3. What is the value of Manchester United?

Let’s say Sir Jim cannot work his magic and the club’s economic performance continues to disappoint. It will be a continuation of the trends in declining cash and burgeoning debt levels. The stadium refurbishment/rebuild will be abandoned and followed by vain attempts to pull in cash by selling assets. The result of this catastrophic turn of events will be a major financial restructuring bordering on a fire sale of assets and perhaps the club itself.

So, the Board, in whatever form it takes, needs to recognise the reality of the current economic position, and execute a turnaround exercise in order to align the business towards a value-driving stance for all stakeholders.

Finally, a valuation of the club based on Adjusted EBITDA is nothing more than a cosmetic exercise designed to flatter egos. A more robust Economic Profit-based valuation will produce an outcome which is more aligned to the club’s economic realities and will drive decision-making down the correct pathway.

Investors have been largely pessimistic up to the point when the latest investment initiative was announced. The Total Shareholder Return performance (for Manchester United) significantly lags the level achieved by the S&P 500 index and as we have highlighted plenty of times before, Manchester United is not a share for your pension fund.

Indeed, much of the focus from academics and other commentators has been on the admittedly impressive revenue growth – which has risen by £253.2m (per annum) or 64% from £395.2m to £648.4m.  Unfortunately, the “cost of sales” is increasing at a faster rate than turnover as demonstrated below:

Consequently, the business has failed to produce a positive economic profit in any of the last 8 years with cumulative losses now approaching £540m. For investors, this points to increasing gloom regarding the future performance of the business and if it is not addressed, it is highly likely that debt will become more expensive.

Between June 2015 and June 2023, total debt rose by £207m (50%) to £624m. During the same period, cash fell by £80m to £76m (decline of 51%). This has resulted in net debt (which is total debt less cash) rising to £548m (110% from June 2015).

The combination of increasing debt and not enough cash, despite rising revenue, will result in a corporate impasse which, given other examples in industry (and football), will overwhelm the club both suddenly and completely.

In our view, the blame for this sorry state of affairs is down to the executive team and ultimately the club owners. The apparent objectives that the business has been set are clearly misaligned with driving value for all stakeholders, which should not come as a surprise if incorrect measures are being applied.

And yet, the justification for the use of such measures is aptly illustrated in the following excerpt from the 2021 annual report.

EBITDA is sometimes known as a ‘proxy for cash’ in financial parlance but the history behind this approach is that the measure was increasingly adopted from the 1980s onwards in order to help bankers take a view on the ability of their customers to make interest payments on debt from the short-term income stream.  The problem is that EBITDA excludes a number of real and significant costs which the business must incur and thus provides an overly optimistic and misleading view of the underlying and very real financial performance. In turn, fundamental errors will inevitably arise as the business fumbles its way through the performance fog. As the late (and great) Charlie Munger said,

‘…every time you hear EBITDA, substitute it for bullshit’.

Of course, the EBITDA measure and the Economic Profit measure generate two very different signals regarding business performance (see above).

Unfortunately, the Board will be using EBITDA to create and approve strategies along with decisions regarding money allocation (transfers) and day-to-day operations. Indeed, the news provided by the EBITDA measure is that the business is doing fine although recent years have been more challenging.

Conversely, the Economic Profit data send a clear signal that the business has endured poor performance levels with the destruction of £540m of value in the last 9 years and is consistently negative. Rather than the ‘onwards and upwards’ trajectory provided by the EBITDA measure, the sentiment from the Economic Profit measure is quite simply ‘this cannot be allowed to continue’.

Nevertheless, the Glazer family sought help or perhaps a way out via a full sale. The Qatari Sheik was initially the front runner with a proposed sizeable outright purchase of the whole operation according to media reports.

However, doubts still remain in some quarters as to just how realistic this particular offer actually was. Meanwhile, Sir Jim deftly crafted a deal which gave him a foot in the door and a place on the sub’s bench. Whether he eventually makes it to the point where he gets to choose the team AND the board remains to be seen.

The question remains as to the motivations behind the initial quest for ‘investment’. The most obvious one is to find a buyer who would pay silly money for the club. The sale of Chelsea at an “optimistic” price may well have encouraged the Glazers to go on a fishing trip for the best price.

The second possible motivation could have been (and probably still is) the need to divest and get rid of the business before it implodes given the excessive amount of value destruction, the diminishing cash reserves and the increasing levels of debt.

The third is that business is/was simply too complex for the current owners to actually fix and thus the best way of dealing with this particular failing is to offload it.

The apparent compromise is to allow Sir Jim to purchase 25% of the club for the equivalent of $33 per share with a potential and further incremental amount in exchange for infrastructure improvements.

It still leaves the Glazers in overall control although football operations are in the hands of Sir Jim and his team whilst the commercial side of the business is remains with the Glazers. It may take more than a jiffy to exercise an improvement in on-pitch performance, but it is notable from our perspective that there is a clear division of responsibilities. It will be interesting to see how this will unfold in a boardroom setting and as students of various TV and film dramas will tell you, there is nothing like a boardroom bust-up.

For shareholders, the ‘change of management’ bounce is already apparent in the current share price ($20.20) but these so-called uplifts tend to be temporary. From a business perspective, there is much to do, not least the restoration of a credible and performing first team which feeds the revenue line via regular Champions League performances and domestic trophies.

As for the value of the club, our calculations arrive at a requirement of £2.8bn in future economic profits in order to justify a share price of $21, based upon 2015-23 economic profit/loss performance. Even the most optimistic investor will realise that this is a considerable stretch given economic losses of £540m over the same period.

The recent business numbers do indeed show declining balance sheet performance despite rising revenues, but the club has to address costs and streamline accordingly, not least in the trading of players and their contracts.

The conundrum regarding the stadium redevelopment will vex for some time yet. As seen with Arsenal and Tottenham Hotspur along with Everton, new stadia do not come cheap. Manchester United may well command a better financing deal than most if the decision is made to rebuild or even relocate Old Trafford but the burden of debt payments will linger for decades. And given the vociferous protests in terms of the current debt regime, we wonder how the fanbase will view such a development.

And if the results don’t come and the club languishes on the fringes of European competition for a few seasons, what then? Super League?  More value destruction? A further change of ownership?

Or will the Reds simply go marching on and on and on….


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