Manchester United IPO - Q&A
What is an IPO?
An Initial Public Offering (IPO) is when a private company becomes a public one by selling shares for the first time.
Why do Manchester United need one? Aren't they rolling in money?
Yes and no. United have announced a seven-year sponsorship deal with Chevrolet, described as being worth £200 million, and beginning in the 2014-15 season, which is the most lucrative in football. They already have a portfolio of sponsors and commercial partners. In the 2010-11 year, they received £31.3 million from their kit manufacturers Nike and have a minimum guaranteed annual income of £25.6 million from them. United's annual commercial income grew from £66 million to £103 million between 2009 and 2011. Broadcasting income rose by around 20% in that time, United's total income for the 2010-11 year was £331.4 million and their adjusted EBITDA - essentially their profit before interest, taxes, depreciation and amortisation are factored in - was £109.7 million. In their IPO prospectus, United say they have "an ability to monetize our brand."
However, United expect their income to decrease by as much as 5% to £315-320 million for the 2011-12 year, while expenses are likely to rise by 4-5%. Moreover, "our net finance costs", as United described them - essentially money spent repaying debts incurred by the Glazer family to finance their 2005 takeover of the club - is expected to be £49-50 million. Finance costs were £51.2 million in 2010-11, £108.5 million in 2009-10 and £117.4 million in 2008-09.
In addition, "as of June 30, 2012, we had approximately £70 million of cash and cash equivalents and approximately £437 million of borrowings outstanding," United reported. In other words, "one of the most popular and successful sports teams in the world," as United describe themselves, owe £437 million. So they need money. Why they need it now, however, has not been fully explained.
So how many shares are they selling and at what price?
United are selling 10% of shares in the club. They are selling 19,166,167 shares at a proposed maximum price of $20 each. If every share sells at its maximum price, that would bring in $383,333,340, or around £244 million, which would make United the most valuable sports club in the world. United say in their prospectus for the IPO that they expect the minimum price per share to be $16. If every share sold at that price, they would raise $306, 665, 872. However, they will incur expenses of $12 million in the IPO. So how much is United worth?
The Glazers bought United in 2005 for just under £800 million. In March, Forbes valued United at $2.24 billion. Depending on the share price after the IPO, however, the club could be valued at $3 billion, potentially even more. Forbes say this could add around $200 million to the worth of the Glazer family, currently around $2.7 billion.
When will this happen?
As early as next week. Friday, August 10 is when United shares could be on sale at the New York Stock Exchange.
Why New York?
The New York stock exchange permits a voting structure whereby some shares carry greater voting powers, of which more later. The London stock exchange does not.
This isn't the first time United have gone to the stock market, is it?
No. The club was on the stock exchange from 1990 until 2005 when the Glazers completed their buyout and took them off the market. Last year, United planned to list the club on the Singapore stock exchange to raise money before deciding against it during a time of stock market volatility.
But aren't stock markets still volatile, so isn't this still risky?
Yes, markets have a tendency to go up and down quickly and, given global economic turmoil, are likely to remain unstable for the foreseeable future. But United's IPO is a bond issue that been underwritten by Jeffries Co., Credit Suisse Securities, J.P. Morgan, BofA Merrill Lynch and Deutsche Bank Securities, so there is less risk attached than when other companies go public. Think of it as an executive insurance policy.
What about private investors? Is United a risky investment for them?
"Investing in our Class A ordinary shares involves a high degree of risk," United say in their IPO prospectus. There are several warnings to investors: of potential damage to the brand and that "our business is dependent upon our ability to attract and retain key personnel, including players." Key personnel obviously also include a manager in his 71st year, Sir Alex Ferguson, while United have lost crucial players - principally Cristiano Ronaldo - in the recent past and Wayne Rooney was unsettled in October 2010. United also say that: "We are dependent upon the performance and popularity of our first team." In particular, revenue from Europe is not guaranteed. In the 2010-11 year, 39.8% of their broadcasting revenue came from the Champions League. But they reached the final that year and last season, when they were eliminated in the group stages and dropped into the Europa League, will prove less lucrative. Fail to qualify for the Champions League at all and revenue would drop further. As United warn "European competitions cannot be relied upon as a source of income." Matchday revenue, which was £110.8 million for the 2010-11 season, is also expected to be lower for the 2011-12 campaign, when Old Trafford staged four fewer games.
However, the new Premier League television deal, worth £3 billion over three years for UK rights alone, will begin next year, so there is one guarantee of an increase in income. Citing a survey by Kantar Media, United say they have 659 million followers and that their games are watched by an average of 49 million people. They sell more than five million branded and licensed United products and their Facebook page has more than 26 million connections (in comparison, the New York Yankees' page has 5.9 million).
If United are on the stock market, will that make them more transparent?
Not really. United are registered in the Cayman Islands and are designated "an emerging growth company" under US federal securities law, which entails "reduced public company reporting requirements". Those reporting restrictions last five years.
Could fans who oppose the Glazers buy the shares and use them to get rid of the owners?
Not unless the Glazers sell a lot more shares, particularly ones with greater voting power. The Glazers are putting up 8,333,333 Class A shares. In addition, the underwriters have a 30-day option to buy a further 2,500,000 shares if there is a high demand. However, if they don't, there are still a further 39,685,700 Class A shares and 124,000,000 Class B shares in the hands of the Glazers - in other words, a vast majority of 90%. Plus Class A shares carry one vote per share and Class B shares 10 votes per share so, in terms of voting rights, the public investors will have 1.3% and the Red Football LLC - a holding company for the Glazers - 98.7%. In addition, United say "Our principal shareholder will have the ability to determine the outcome of all matters submitted to our shareholders for approval, including the election and removal of directors and any merger, consolidation, or sale of all or substantially all of our assets." So the Glazers do not just have the final say, they determine what the conversation is about.
Could it actually be harder to get rid of the Glazers?
Yes. "Anti-takeover provisions in our organizational documents and Cayman Islands law may discourage or prevent a change of control, even if an acquisition would be beneficial to our shareholders, which could depress the price of our shares and prevent attempts by our shareholders to replace or remove our current management," United state in the prospectus. This is a change in their constitution and, in addition, it allows the Glazers to issue more shares - which would dilute the holding of anyone else who buys them now.
So why buy shares?
Apart from those with an affiliation to United, the same reasons people buy shares in Apple, Facebook or any other company: because they believe it will appreciate in value and be a worthwhile investment in the short or long term.
But if United raise all this money, will their debt be reduced?
"We intend to use all of our net proceeds from this offering to reduce our indebtedness by... $116.8 million (£73.0 million)," United state.
That is what the fans want, isn't it? And what about the rest? Will Sir Alex Ferguson have a huge transfer kitty?
The fans want reduced debt, yes, partly because debt, and its repayments, is eating up United's profit (they have an adjusted EBITDA of £305.1 million for the last three financial years when full figures are available, but net finance costs of £277.1 million in the same time). But the Glazers had indicated they would use all the funds raised from a flotation to reduce the debt.
Now, however, the proceeds of the sales of 16,000,000 Class A shares have been reserved for an "equity incentive award plan". United said in the prospectus: "The principal purpose of the Equity Plan will be to attract, retain and motivate selected employees, consultants and non-employee directors through the granting of share-based and cash-based compensation awards."
How much is it worth? And does Ferguson gain?
Depending upon the share price, it could be worth up to $320m (£204m). No one is specified by either name or job title. However, it is a logical assumption that Ferguson and chief executive David Gill would be among the major beneficiaries.
What have United had to say about this?
"Under the regulations of the SEC [Securities and Exchange Commission], we are not permitted to disclose the contents of the document," a club spokesman told the Guardian.
What has Ferguson had to say about it?
Nothing in the last few days, but last month he said: "They [the Glazers] have always been as sensible as they can be in terms of financing the club. They have to invest in the team to maintain the value of their asset. I think there are a whole lot of factions at United that think they own the club. They will always be contentious about whoever owns the club and that's the way it has always been.
"When the Glazers took over here there was dissatisfaction, so there have always been pockets of supporters who have their views. But I think the majority of real fans will look at it realistically and say it's not affecting the team. We've won four championships since they've been there and one European Cup."
Why does Ferguson argue the Glazers have been good for United?
In terms of silverware, their seven-year ownership has been one of the most successful spells in the club's history with four Premier League titles and three Champions League finals, one of them ending in victory. Ferguson argues that hands-off owners give him the freedom to do his job as he wishes.
"I am comfortable with the Glazers. They have been great," he said last month. "They have always backed me whenever I have asked them. I have never faced any opposition."
And why do some supporters argue they have been bad for the club?
Principally because around £550 million has gone out of a previously debt-free club in the past seven years to service debt, pay interest and bank and loan fees.
What is their attitude towards Ferguson?
"We now know why Sir Alex was quite so in favour of the Glazer family," said Andy Green, the United supporter and football finance expert who runs the andersred blog, referring to the share scheme. "I think he is risking tarnishing some of his legacy, which is a great shame because he is the greatest manager probably in English football history. But his association with all this skullduggery is sad."
And what is their view of the IPO?
"It is barely going to scratch the surface of the debt," Green said. "It won't help at all. It is a wasted opportunity. They should have floated a larger element of the club. They should have given one vote per share and they should have let the fans take part. When you work through all the numbers, it will reduce the debt from around £425 to £350 million. It will save around £5 million a year in interest. That is barely enough to buy a new trainee for the academy."
Duncan Drasdo, chief executive of the Manchester United Supporters Trust, said: "There is now no doubt that this IPO is bad for Manchester United supporters, Manchester United Football Club and any investors gullible enough to pay the inflated price they've attached to inferior shares which have just 1/10 of the voting rights of the Glazers shares and no dividends. Their bare-faced cheek is almost unbelievable."
What do industry experts say?
"The valuation looks very overextended," said Josef Schuster of Chicago investment firm Ipox Schuster. Green also argued that the Glazers have overvalued the club. "It's an extraordinary valuation and I think they may well struggle," he told Sky News. "Most savvy investors will be wary of this offer."