Why I'm Not Playing With This Team
Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Football – soccer, for the USians – is one of the biggest popular passions in Europe and South America; we think, talk, dream and even obsess about our beloved teams, their performance and their perspectives. For this reason, a stock like Manchester United (NYSE: MANU) sounds like an interesting alternative for investors looking to profit from a truly loyal – even fanatic – customer base.
On the other hand, there are some serious red flags which make a position in Manchester United a risky idea, even to the point of the negatives outweighing the positives. Every company needs to balance the needs and interests of its clients, employees, shareholders and society, but in United´s case, the situation is particularly tricky.
When things are going well and the team is winning, players usually ask for a bigger contracts and prizes for their achievements, and it’s hard for management to control those pressures since other big clubs are always looking to hire the most renowned stars.
And things become much more complicated when the results are not the ones expected; the fans and the media can be tremendously vocal on the need to hire more and better players precisely when income from sponsorships and ticket sales is lackluster due to disappointing results achieved in the field.
Players demand more money in times of victories, and the fans demand more players when the team is losing. You need a very balanced management team in order to handle those pressures and still provide shareholders with a solid financial picture. The temptation to get into too much debt in order to achieve the much-desired results has traditionally been a big problem for football clubs, and Manchester United is not exempt.
There are reasons to be concerned about the team, and I'm not talking about the players. It’s the management team that looks suspicious in United’s case. The Glazer family owns a 98% voting stake in United due to their ownership of high-vote class-B shares, which puts outside investors at a disadvantage.
Investors don't have many resources to challenge the Glazers under the current share structure, and there are some related party transactions which look quite dubious: loans from Manchester United to the Glazers and consulting fees from the Glazers and the family being credited to the club, among others.
Also, only half the proceeds from the IPO went to the club for debt reduction; the other half was pocketed by the Glazers, so they have been cashing out lately. Overall, it looks like the Glazers are leaving the downside economic risk to outside shareholders, while retaining their political control over the club and selling part of their stake in the market.
There are many examples of companies with dual class share structures, and not all of them are hard to understand. In Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), for example, Buffett gets to call the shots if there are important disagreements between him and other shareholders, and there are logical reasons for this.
The Oracle of Omaha likes keeping his powder dry and being ready to make quick decisions when he believes the opportunity deserves such moves. For example, Berkshire made a couple of juicy deals with Bank of America and Goldman Sachs when those institutions were in need of fresh capital during the last crisis. Buffett´s ability to make relevant decisions without asking for anyone’s permission is a big asset for Berkshire, and the dual class share structure guarantees that possibility.
This kind of voting structure is quite common in the tech industry too, with Google (NASDAQ: GOOG) being one noteworthy example. In the company's founder's letter of 2012, Larry Page explains the rationality for this by analyzing products like Android and Chrome, both of which required years of efforts and investments without any monetary compensation, but with big a strategic impact in the long term. An investment in Google is a vote of trust in the founding team as well as their ability to read industry trends and make sound innovative decisions.
In companies like Google or Berkshire Hathaway, it's logical to assume that the founders have a deeper understanding of industry dynamics than outside shareholders, and they have earned a lot of respect by building those two companies into highly successful businesses. Therefore, there are some understandable reasons behind the dual voting structure in those cases.
But the Manchester United situation is a very different thing. The Glazers just bought their ownership position with money coming from unrelated businesses like food processing. They haven't proven a superior ability when it comes to managing a football club, which can be a really complicated task. Besides, the related party transactions are not precisely a source of trust here.
I love the sport and I really like the club – one of the most valuable franchises in the planet – but I'm no fan of the management team, especially under the current voting structure. I'm sorry to reject such an interesting possibility, but I'm not playing these guys.
acardenal owns shares of Google and Berkshire Hathaway. The Motley Fool owns shares of Berkshire Hathaway and Google. Motley Fool newsletter services recommend Berkshire Hathaway and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
