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The Good, the Bad and the Ugly

Andrés is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

For those of us who understand the passion involved in football –  called soccer in the US –  Manchester United (NYSE: MANU) sounds like a unique opportunity to invest in one of the most powerful teams on the planet, with a tremendous brand power and millions of followers on a global scale. Digging below the surface, however, the economics of an investment in United don't seem very exciting, and the management team leaves a lot to be desired.

The Good: The Club

Chicharito Hernández was the big star for Manchester United last week; the Mexican born player entered the game during halftime, scoring three goals in only 45 minutes for United to turn the game around versus Aston Villa, finally winning by 3-2.  Thanks to Hernández and his teammates, “The Red Devils” are currently in the first position in the Premier League.

This should hardly come as a surprise, as we can see from the chart published in United´s 20-F, the club has an enviable history of championships and glory. Manchester United is arguably the most important club in England, and one of the biggest in the world judging by its glorious history and gigantic popularity.

<img src="/media/images/user_1532/finishing_large.png" />

In July 2012, Manchester United was ranked first by Forbes magazine in its list of the ten most valuable sports team brands, valuing the Manchester United brand at $2.23 billion. The club is currently ranked third in the Deloitte Football Money League (behind Real Madrid and Barcelona).

The Bad: The Business  

Manchester United has three different classes of revenue sources: stadium attendance, TV contracts and sponsorship, and it won't be easy for management to generate big increases in revenue from any of these sources over the following years.

Stadium locations are almost completely sold out on a permanent basis, this revenue source depends on how many games United plays per year, and the team usually advances pretty far in tournaments like UEFA Champions League, so big increases in attendance are not likely from current levels. There is some room for price increases over time, but that's not precisely a strategy most United fans would appreciate.

United does not control the TV contracts; they are handled by the English Premier League for the EPL games and UEFA for the UEFA Championship League. The club can renegotiate its share of the TV rights, and moderate increases in the value of these contracts can be expected over time, but this revenue source is beyond management control to a good degree.

Sponsorship is a whole different issue, and United has been actively working to maximize that revenue source over the last years. The club is in the second season of a shirt sponsorship with Aon (NYSE: AON) that is contracted through the end of the 2013/14 season. The deal with AON has produced an average annual payment of 19.6 million British Pounds from 2010 to 2012, while the previous sponsorship deal with AIG generated an annual average of 14.1 million from 2006 to 2010, that's a big increase of 39% from one sponsor to the other.

In July of 2012, United signed a seven-year deal with General Motors (NYSE: GM), so Chevrolet will replace Aon as the main shirt sponsor from the 2014–15 season. Annual fees from this new agreement will be $70.0 million in the first season, and will increase by an additional 2.1% in each season thereafter through the term of the agreement. United will also receive approximately $18.6 million in fees in each of the 2012/13 season and 2013/14 season relating to pre-sponsorship support and exposure. Total fees payable through the end of the 2020/21 season under the new shirt sponsorship agreement is approximately $559 million.

The club´s retail, merchandising, apparel & product licensing business is currently managed by Nike (NYSE: NKE). United is in the eleventh year of a 13 year agreement with Nike which includes a combination of fixed minimum payments and extra variable income depending on sales.

Sponsorship, which represents between 30% and 35% of total revenue on an average year, is the only revenue source management can effectively control, and it seems to be maxed out in the middle term. Manchester United is so big and successful, that it will be really hard for the club to generate substantial increases in revenue over the following years.

The Ugly: Management

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 in case of conflicts of interests. Dual class share structures are always a polemic issue, and in United´s case it seems completely unjustified.

Dual structures are common in industries like technology, where the founding members want to keep control of the company and capitalize their industry specific knowledge to make important decisions without the intromission of outside shareholders. In Google (NASDAQ: GOOG)´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 investments without any monetary compensation, but with a big strategic impact in the long term.

Unless United is planning to make some really complicated strategic investments, this dual class share structure doesn’t make much sense. It seems like the Glazer family wants to keep political control, but share the economic risks with outside investors.

And it doesn't stop there, there have been related party transactions between the club and the Glazer family which deserve a careful examination. Among them:

  • Loans from the club to the Glazer family
  • Consulting fees paid by United to a company owned by the Glazers
  • The Glazers own a portion of United´s debt.

More details about these related party transactions can be found in this link to United´s 20-F.

None of these is illegal, but it's not very transparent either. United decided to go public in the US instead of the UK, and it did it under the JOBS Act which reduces compliance requirements. This is another red flag to consider when it comes to transparency and corporate governance.

End of the Game

Manchester United is a fantastic club, but a mediocre business with a management team that doesn't seem to be playing a fair game with investors. It's better to watch this match from the sidelines.

acardenal owns shares of Google. The Motley Fool owns shares of Aon, Google, and Nike. Motley Fool newsletter services recommend Aon, General Motors Company, Google, and Nike. 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.

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