News and opinion on our controversial owners. Love United, hate Glazer (LUHG).
The Glazers: Things have changed

(Warning: this is an article about the Glazers and finance that will make almost no mention of the ruinous debt the Glazers have saddled Manchester United Football Club with.  It is assumed that any reader has at least a basic understanding of the issues relating to that debt, but if not, much has already been written about those issues and can be found easily by a quick internet search.)

I was asking myself the other day: “Why are the Glazers still hanging around?”

The Glazer family clearly have no natural affinity for the Beautiful Game or for the great club that is Manchester United Football Club.  It’s blindingly obvious that the Glazers are squatting in our club for the sole purpose of enriching themselves.

But as clear as that proposition is, given the recent travails in Manchester United’s share price, with headlines like “220 million pounds wiped off United’s value in December”, I did wonder whether what had for about 8 years seemed one of the most risk-free punts in global sports industry investment had changed significantly enough for the Glazers to begin thinking about selling out.  And that thought process led me to wonder how their journey so far has treated them, why the heck they were still even here, and where they might go from here.

Overall Financial Return over Ownership Period – 2005 to 2014

The Glazers acquired effective control of MUFC around 16 May 2005 when the family acquired 75% of the shares in the PLC.  That allowed the family to delist the PLC from the London Stock Exchange, and to start the process of buying out the remaining 25% of the shareholders.  The valuation of the club at the time of the acquisition was approximately 800 million pounds, or US$1.5 billion using the then-current exchange rate.  By way of comparison, the S&P500 share index (for the uninitiated, an indicator of the value of a broad basket of US listed shares) on 16 May 2005 was 1,165.69.  This latter number is not particularly meaningful, by the way, but will be useful as a benchmark.

Fast forward to 8 January 2014.  Having been listed on the NY Stock Exchange on Friday 10 August 2012 at a value of US$14 per share, the share price is now US$15.15 per share.  The club is in total valued at US$2.48 billion.

Let’s be very slightly generous and estimate the increase in the value of the club over the last 8 and a half odd years at US$1 billion.  When compared to the initial investment value of US$1.5 billion, that’s a return of 67%.

During that same period, the US S&P500 index has grown to a value of 1,837.49.  By comparison, that’s a return of 58%.

What does that mean?  It means that the Glazers have made more money by owning MUFC than they would have made if in May 2005 they had instead bought an average portfolio of US companies.  They have outperformed the stock market, and given the inherent riskiness of owning a sports club relative to other types of companies, that’s actually a very remarkable achievement.  It certainly does explain why the Glazers have held onto their investment for so long – it’s been more profitable for them to hang onto MUFC than to sell out and reinvest their ill-gotten gains elsewhere.

However, while this is a reasonable depiction of their overall ownership and investment return, I think it’s useful to break their ownership period down into two periods.

First Period: The Genius of Ferguson & Co (2005 to May 2013)

(1) To the summit – the period to February 2013

The first relevant period is the period marked by the management of the club by Sir Alex Ferguson, in relation to on-pitch matters, and David Gill, in the executive offices. Both were in their respective positions when the Glazers took over, and while it’s debatable exactly when the market judged that period to have ended, we either use 8 May 2013 (the day it was officially confirmed that Sir Alex would be retiring) or 30 June 2013 (being Sir Alex’s official final day as manager of MUFC).

The highest value that MUFC (or, to use its official NY Stock Exchange ticker symbol, MANU) shares have been valued at during the listing period is US$19.34 on 8 February 2013. On that date, the club was valued at approximately US$3.2 billion – based on the initial investment value of US$1.5 billion, that’s a return on investment of an astounding 113%.

By comparison, the S&P500 index was worth 1,517.93 – in other words, while MUFC had increased in value by 113%, over the same time the US stock market had in effect only grown by 30%. That’s an investment overperformance of 83%, which is frankly incredible.

Stock market investors don’t particularly care about success in football competitions, but they do care about revenues, and it’s clear that MUFC revenues were driven by a combination of on-pitch success (delivered by Sir Alex), prudent financial management (supervised by Gill) and, in fairness, an aggressive and voracious drive in growth in commercial revenues (spearheaded by Ed Woodward, now Executive Vice-Chairman of MUFC and effectively the chief executive, and Richard Arnold, the current Group Managing Director). Sir Alex is obviously the only one of those club personnel that the average fan cares about, but it would be unfair to attribute the commercial success of the club solely to him – it has been delivered by the entire team, whose work has depended on each other. Sir Alex delivered success on the pitch, which made it easier for Woodward and Arnold to sell the club to potential commercial partners and sponsors such as Aon, Chevrolet, Aeroflot and so forth. Meanwhile Gill supervised the financial aspect of the club, negotiated contracts and transfers, and generally kept the off-pitch matters ticking over.

(In fairness, MUFC has also benefited greatly from television rights deals that were negotiated on its behalf by Premier League chief executive Richard Scudamore, and by the commercial team at UEFA that negotiate the rights deals for Champions League television deals. Hence, not all of the credit for the increase in MUFC’s value is down to the MUFC executive team.)

At any rate, during the time that MUFC’s management “dream team” was in place, it was very apparent why the Glazers were hanging onto the club. They controlled one of the biggest sports entities in the world (by way of comparison, the most valuable NFL franchise is the Dallas Cowboys, which was valued at US$2.3 billion by the business magazine Forbes in August 2013), with all the prestige that entails, and even if they had sold the club, finding something else as profitable to invest in would not have been simple.

It’s interesting to ask why the MUFC share price peaked in early February 2013. Frankly, it’s impossible to say. It may be that investors realised that the euphoria of being domestic champions-elect with four months of the Premier League season had led them to go overboard in valuing the club, and then reality struck – bear in mind that the club’s 2nd quarter/1st half financial results for 2012-13 were released around that time, and it may be that investors who had been fired up by their view of the club’s growth prospects reassessed those beliefs after reviewing the actual financial results and factoring in the information contained therein.

(2) Sir Alex wins the Premier League title, then retires – February to May 2013

For whatever reason, the MUFC stock price drifted downwards throughout February and March 2013, before starting to tick back up in early April 2013. The stock price hit a low of US$16.19 on 3 April 2013 but by 6 May 2013 had recovered to US$18.52 per share. It’s likely that some confidence in the stock had been restored by the release of the 3rd quarter financial results, with MUFC executives holding a regularly scheduled conference call with investors to discuss the financials on 2 May 2013.

The football world was rocked on 7 May 2013 by rumours that Sir Alex Ferguson was considering retiring from his position as manager of MUFC. The stock price was completely unmoved by these rumours, and in fact closed up US$0.25 per share at US$18.75 per share, in defiance of any reasonable expectations. However, it may be that investors were awaiting confirmation of the rumours as after Sir Alex and the club officially confirmed on 8 May 2013 that he would indeed be retiring, the share price dropped by US$0.33 per share to US$18.44 per share.

MUFC moved quickly to prevent any perception of a vacuum at the top, and only a day after announcing that Sir Alex would be retiring, the club announced to the NY Stock Exchange on Thursday 9 May 2013 that it had identified its chosen successor: David Moyes.

Second Period: Moyes/Woodward & Beyond (May 2013 to January 2014)

While David Moyes was officially to start in his role as MUFC manager on 1 July 2013, as far as investors were concerned they were assessing the value of the club from the time that he was officially confirmed in that role. That date was 9 May 2013. On that day, the stock dropped a further US$0.42 per share to US$18.02 per share. Based on that share price, the club was valued at approximately US$2.94 billion.

For reference purposes, the broader US S&P500 index on that date was valued at 1,626.67 – that figure by itself is fairly meaningless but again serves as a benchmark.

All readers will be aware of the ups and downs of the first period of David Moyes’ tenure as MUFC manager, so there is no need to go into them here. From a financial standpoint, let’s fast forward to the last NYSE trading day at the time of this article, being 8 January 2014. On that date, the MUFC share price closed at US$15.15 per share, valuing the club at US$2.48 billion. Meanwhile, the S&P500 index closed at 1,837.49.

What does this all mean? Firstly, the post-Ferguson/Gill era of ownership for the Glazers has been marked by a reduction in the value of their investment in MUFC of approximately half a billion dollars. (Ironically, that’s roughly the amount of debt they scandalously injected into the club when they bought it, but this article isn’t about the debt!) That’s a negative return (ie a loss) on their investment during 7 months of about minus 15%.

At the same time, during that same period, the US stock market has gone up by about 13%, from 1,626.67 to 1,837.49 (the S&P500 index is being used as a proxy for the broader market). So on that basis, MUFC has actually underperformed the broader US stock market by minus 28%.

Bear in mind that over the first 8 years of their ownership, the Glazers made a peak of 113% on their investment. Using simple averaging (compounding would be more accurate I’m too lazy to work out the compound return), that’s about 14% growth a year.

In the half year or so since Sir Alex and Gill have retired, the Glazers have already “lost” on paper approximately the same amount as they’ve made each year of their ownership.

Moreover, if they’d sold the club for US$2.94bn on the day that David Moyes was confirmed as MUFC manager, and reinvested the sales proceeds in the US stock market, they would’ve made an additional US$380m in profit.

From an opportunity cost basis (ie taking into account both the paper loss they’ve made on their MUFC shares, and the profit they could’ve made but didn’t if they’d invested in the US stock market instead) the Glazers have basically missed out on something like US$800 million of lost potential profits. In seven months.

Have a look at this diagram, which shows the performance of both MUFC shares (shown as MANU in blue) and the broader US stock market, being proxied by the S&P500 index (in red) – I’ve graphed the performance over the entire period that MUFC has been listed on the NYSE, ie from August 2012 (and before you ask, I couldn’t figure out how to show MUFC/MANU in red – sorry about that!):

This diagram simply illustrates all of the verbiage in this article so far. There was an initial dip in the value of MUFC shares as invested questioned whether the US$14 per share price was too high, but as RVP was powering the team to wins on the pitch, and as Woodward and Arnold were signing sponsor after sponsor off it, the stock price recovered and started to outperform the broader US stock market. The MUFC stock price took a hit after the announced retirement of Sir Alex in May 2013, then recovered again during the early optimism of the Moyes era. However, you can see that growing optimism about the US economy was leading the S&P500 to outperform in Novermber 2013. It’s no secret that December 2013 was terrible for the MUFC stock price, while the US stock market continued to power on.

While none of us should have any sympathy whatsoever for the Glazers and their cronies, from the Glazer family’s perspective, the last part of the graph above is awful viewing.

What does this all mean?

This is where it’s useful to break the Glazer ownership down into 2 separate periods.  Overall, the Glazers look like still they’re on a winner financially, but that’s not an entirely accurate picture.

The Ferguson/Gill era was marked by stability and success, and it’s clear as to why the Glazers held onto the club throughout this period – not only was it a profitable investment, it was more profitable than alternative investments.  Simply put, it would’ve made no sense for the Glazers to sell, unless they were offered a sale price that was far in excess of what the club was actually worth.

The current Moyes/Woodward era, on the other hand, has frankly been terrible for the Glazers.  The club has dropped in value by about half a billion US dollars, and had the Glazers sold out before Sir Alex had retired and invested their money elsewhere, they might be as much as US$800 million ahead.

One point that is worth addressing is something that I’ve seen mentioned on social media like Twitter, and that’s the assertion that “none of this matters unless the Glazers want to sell the club”.  That’s overly simplistic, as a reduction in the MUFC share price affects the Glazers even if they intend to retain control of the club.  There are at least two ways in which this is the case.

Firstly, there have been persistent rumours that the IPO in August 2012 was only the first tranche of shares that the Glazers wanted to sell.  The Glazers only sold about 2% of the shares in the club in the IPO, but having completed the IPO are now in a position to sell more of their stock to the market (up to a further 48%) whilst retaining a controlling interest in the club.  The lower the share price, though, the less money the Glazers would receive and hence the less keen they might be to sell.

Secondly, the Glazers are able to monetize their shares in MUFC even without selling them.  Their bankers would be prepared to lend to the Glazers, using the shares as collateral.  For example, let’s say that the Glazers wanted to raise US$250m without selling shares – they could simply approach one of their banks and borrow US$250m in cash by pledging shares of a greater value.  The bank would be prepared to make that loan because even if the Glazers don’t repay the loan, the bank could simply seize the pledged shares and sell them to generate cash to then repay the loan.  It may sound complex but think of it along the lines of a mortgage on a house.  Again, the lower the share price, the less the Glazers can borrow because the security value of their stock is less.

So the drop in value of MUFC does affect the Glazers, even if they don’t plan to sell the entire club.

However, given how much money they could’ve made if they had sold the club, maybe it’s something they should consider…

Will the Glazers sell?

There’s no way that anyone who doesn’t work closely with the Glazers can answer that question.  However, if I had to guess, I would say they won’t sell in the short-term.  The reason for that is simple greed: the Glazers and their henchman Woodward have seen a point less than a year ago at which the club was worth approximately US$700m (or almost 30%r) more than it is now, and they very likely believe that with some skilful navigation of this current turbulent period, the club can reach that summit again.  However, the pressure on the MUFC management team, both the football side and the commercial side, to reverse the destruction in shareholder value will be enormous.

Most readers won’t particularly care about the commercial side, and that’s not transparent to anyone outside the club anyway so it’s difficult to write about with any accuracy, but we can speculate as to the demands on the football side.

The club has clearly been briefing reporters that it can survive a year without Champions League football, and that’s clearly right.  However, the share price currently reflects a scenario where the revenue from Champions League football next season hasn’t been completely written off; if it’s confirmed that the club is going to miss out, because it hasn’t finished in the top 4, expect the share price to tank even further.

The club has also been briefing that it is prepared to spend up to 200 million pounds on new players.  While I’ve no idea if that’s true or not, it does seem very clear to me that the Glazers will only allow the club to spend 200 million pounds if they believe that such spending will lead to a greater increase in the value of their shares.  If they regard the likely benefit of such spending as being outweighed by the cost, it seems highly unlikely that they will sanction such spending.

Finally, both fans and journalists have been confidently predicting that David Moyes will be given time to “get it right”, with most speculating that he has a minimum of two years to learn how to be a Manchester United manager and to start winning consistently.  Given that the Glazers may well regard him as the man who’s already cost them US$800 million, personally I’m not so sur

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