Manchester United’s owners stand to make about three times their investment in the club if it successfully goes public.
The club has kicked off the marketing for its US initial public offering, which will value it at $3.3bn if the sale is at the high end of the pricing range of $16-$20 a share.
The Glazer family, bought the team for £790m (€981m) in 2005 in a leveraged buyout. In terms of equity, the Florida-based family, whose other interests include shopping centres and the Tampa Bay Buccaneers NFL team, has invested at least £521.1m in Man United.
Through the IPO, they will initially get up to $167m (€132.5m) from their sale of 8.3m shares.
They will also still own 89.8% of the shares, which will be worth nearly $3bn at a $20 a share price. The Glazers have already received a £10m dividend, which was used to pay back money they borrowed from the club in 2008.
The huge profit for the family could make Man United the latest poster child for potential problems faced by companies that become targets of leveraged buyouts. To critics, such deals load firms with debt to supercharge the owners’ profits, while sometimes leaving the companies worse off than they were before.
The risk may be greater for a sports team, where finances can turn on how well the team does on the field, which can depend on a club having enough money to buy and pay top players.
Man United, which was debt-free before the Glazers bought it, had £437m of debt as of Jun 30.
Manchester United Supporters Trust, a group of almost 180,000 fans, plans a mass postal campaign against the IPO.
“From the Manchester United Supporters’ Trust point of view, we want to send a message to US banks that this IPO is very unpopular, and they should not underwrite it,” said Sean Bones, a member of the group.
“We see the Glazers as using the club as a cash cow, and this IPO is milking time.”
There is no guarantee the Glazers will be able to reap a big return. Man United is betting that it will be able to command an exceptionally high valuation, but investors and bankers said achieving that number could be a reach.
At an IPO price of $20 per share, Man United’s enterprise value would be eight times revenue, rivalling one of the richest sports deals in recent years.
Earlier this year, a group spearheaded by former basketball great Earvin “Magic” Johnson paid 8.3 times revenue to buy the Los Angeles Dodgers baseball team, according to a source.
The $2bn price for that deal marked the largest sum ever spent for a major league US sport franchise.
Looked at another way, Man United will be valued at around 26 times its adjusted earnings before interest, tax, depreciation, and amortisation in the 12 months through Jun 30.
“Manchester United is probably the crown jewel of sports franchises, but even it shouldn’t get the valuation it’s seeking here,” said Josef Schuster of IPOX Schuster.
The company’s latest financials also paint a picture of a club with money problems.
By Jun 30, 2010, the Glazers had seen their equity in the club wiped out as losses piled up, and injected £249.1m in November that year to pay down expensive debt.
While the club projects its profit for the fiscal year ended Jun 30 will climb 62% to 77%, this was the result of a tax credit, without which it would have posted a loss.
Moreover, its revenues are volatile and depend on how well the team does.
To be sure, it is not all doom and gloom. A seven-year club shirt sponsorship deal with General Motors, starting in 2014, will be a consistent source of revenue. The deal is worth roughly $600m.
Executives argue that the team is in the early stages of making more money off the strength of its brand around the globe.
Emerging markets in particular comprise a valuable commercial opportunity.
“It’s a global media company that participates in the most watched sport in the world. Investors don’t have easy access to a company like that,” said Michael Obuchowski, of North Shore Asset Management.
Potential investors are “buying equity in something that is already heavily leveraged and doesn’t have a sustainable profit”, said Bob Boland, of New York University.
“This is like buying a piece of land with a mortgage already on it,” the academic added.
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