Wednesday, 17 August 2011

The key issues surrounding a United flotation in Singapore

Readers will no doubt have seen the story, initially reported by Reuters’ International Financing Review news service yesterday, that the Glazers are planning to float a minority stake in Manchester United on the Singapore stock exchange (the "SGX") later this year. This story follows rumours in recent months of a listing in Hong Kong.


What could it mean for the club?

The first thing to say is that we have few details to go on. IFR mentions a “$1bn” listing, around £600m. How much of the club that would represent depends on the valuation on flotation the Glazers could achieve. Suggestions in the media that £600m could be raised with the Glazers only selling around 30-35% would indicate a very high valuation in excess of 21x EBITDA[1]. By comparison, Stan Kroenke’s acquisition of Arsenal earlier this year was at a valuation of around 14.6x EBITDA and Fenway paid 11.4x EBITDA for Liverpool in 2010. The suggested United numbers may of course be bankers’ puff, but they are certainly aggressive.

The second obvious statement to make is that actions the Glazers take are generally for the good of the Glazers and nobody else. It is notable that neither the club nor the family have made any attempt to consider supporter involvement in any flotation. Information is, as usual, very scarce.

In my view there are three main issues for supporters stemming from this news:

1. What will the Glazers would do with the proceeds of an IPO?

One obvious answer is to pay down some of the club’s £400m (net) debt, the bonds issued in 2010. That would, without question, be good for the club, reducing the interest bill (currently around £45m per annum) and freeing up more cash to invest in the club.

The other answer, and in my view far more plausible, is that the cash will go to Florida to bolster the Glazers’ personal finances. As has been well documented, the Glazers obtained £249.1m (c. $400m) from an unknown source in November 2010 to repay the infamous PIKs. I have it on good authority that this money was borrowed. The family’s highly leveraged US strip malls business, First Allied, continues to struggle. In 2013, NFL teams will have to meet a wage “floor” which will (on current figures) reduce the profitability of the notoriously low spending Tampa Bay Buccaneers.  All in all, the family could do with a significant injection of cash.

It seems logical that the flotation plan is really just the “Plan B” adopted by the family after they decided (in the face of the green and gold protests) not to use United’s cash to deal with the PIKs (for evidence of this fear of supporters see this Bloomberg article from October 2010). With the club's cash pile not available, a minority IPO is the logical next choice to get the Glazers out of their financial hole.

If I am right and the Glazers are intending just to take some personal profits, there will be little short-term impact on United’s finances, although the club's dividend policy may change. The club would not be obliged to pay dividends after flotation, but there is a risk that further cash would have to leave the club under the new structure. On the flip-side, if an IPO relieves the financial pressure on the family, the risk of them taking dividends out (which they are already able to do) is reduced. Once again we need more information.


2. Should supporters try/want to buy shares?

Looking back, many fans realise that we missed our chance between 1991 and 2005 to build a meaningful supporters’ stake in Manchester United when it was listed on the London Stock Exchange. Leaving ownership to City institutions led to the Sky bid, the manipulation of the club by Magnier and McManus and eventually the Glazer takeover.

A flotation of United, even in Singapore, gives an opportunity to own shares in our football club again and that cannot be dismissed out of hand. The problem is of course that any supporter stake would be as a minority in a Glazer controlled business. With the suggested valuation so high the sums needed for a meaningful stake look very difficult to achieve.

Despite these issues, I think as details emerge, we should as supporters look very carefully at this new opportunity. A minority sale is a major change in approach by the Glazers and looks likely to be the beginning of the process of them selling the club (although this may take some years). If that is the case, supporters need to be thinking now about how they can be part of a new ownership structure.

The sheer size of Manchester United may appear to preclude any major stake for fans, but in some ways the scale of our support provides the opportunity. MUST have 172,000 registered “e-members”, the club claims 330m “fans”. Looking at those two numbers, could 1 million supporters be brought together in the next twelve months and commit to invest £100 each? That would be a significant toe hold. A great first step on the way to greater supporter involvement in years to come.

3. What should we do now?

In the short-term, we all need more information on what the Glazers are planning. How much will they sell, to whom, when, what will the board structure be, what will the dividend policy be, how long will the family’s remaining stake be “locked up” etc, etc, etc. Without this information we can only talk in generalities.

As these facts come out, I passionately believe we need to achieve some new unity amongst our support. MUST will, as the mass membership official supporters trust, take the lead, but we need to try and build a consensus with all groups including IMUSA, the three fanzines, principal forums, FCUM (who remain part of the family), and possibly members of the “Red Knights” consortium and groups like Stretford End Flags and others who some feel haven’t been sufficiently “anti” in recent years.



It may be that none of the numbers stack up when we see them. It may be that unity is not possible, but we screwed up our last opportunity to get meaningful supporter ownership in our club and we would be wrong not to look at this opportunity closely. Together. United.

LUHG 



1. 21x EBITDA calculated as follows: Estimated 2010/11 EBITDA £110m. £600m for 30% of equity implies equity valuation of £2bn. Current net debt (outstanding bonds less cash at bank) c. £400m. Enterprise value therefore £2bn + £400m = £2.4bn or 21.8x EBITDA.

29 comments:

Algy said...

I have been "beating the drum" for a unified front on this for some time. The protests (albeit focussing attention on the fans plight) were to "ad-hoc" and sporadic. Twitter is an excellent medium for co-ordinating causes and maybe this is a way of bringing interested parties together on the issue.

andersred said...

I agree Algy. The game is moving on from boycott/don't boycott. Time to seek a United front and rally the fan base more widely.

anders

Daniel said...

whats the story with them potentially paying off the loan for the piks, wasnt we told this wasn't the clubs responsibility? ..Its a disgrace already whats gone on, but if they use this money to pay off the family debts ahead of the clubs debt they created it really is a further insult imo.

Drizzt said...

as a Singaporean, we hope that we have a chance to support and rejuvenate the club.

I written my opinon of this IPO on the SGX here but i seriously think that its a really overvalued IPO. I wonder how big of a fan i am to support this really.

Drizzt
Investment Moats.com

andersred said...

Hi Drizzt,

Thanks for the comment and link. I agree on the valuation on the current (limited) info we have.

Maybe a more rational secondary market price will offer a better opportunity for fans.

anders

porrig said...

I'm very interested in being a part of a collective shareholding in the club, but I know nothing about shares so I have a few q's.

My questions are:
1) How do we buy shares in another country (never bought shares in anything before)?
2) Are there any traps/obstacles to be aware of to ensure fans get the best possible deal when investing in the club?
3) To have a collective holding surely we need to be grouped together under one entity (with one main spokesperson) - how best can we form this group, given how fractured our support is and how emotive the issue is?
4) How do we reach out to those supporters who don't read blogs, fanzines, twitter, etc? Can we get any real support or acknowledgement from the mainstream press for fan driven efforts?

Great blog as always, thanks. Mike.

Anonymous said...

Would love to own a small stake in Manchester United. I think you could easily find million people with the amount you mentioned. The thing we need is a unified lead to buy a share.

Anonymous said...

Anders - Surely it would benefit the Glazers far more to buy back the bonds? This way they could use the £47m interest money to take out in dividends instead. Pay the investors 30% and keep 70% for themselves. If the dividends is £48m a year, that's £33.6m in the Glazer's pockets every year. This will keep their malls, the Buccaneers & the refinanced PIKs in check.

Mike

SaneLynch said...

Very good article Anders and I completely agree with you that the supporters need to be completely United, but I can't see that happening. However, I find it extremely unlikely that one million (if they exist) United fans will contribute £100 each to a fund - see the fact that United struggle to sell 73,000 tickets regularly for home games.

andersred said...

Mike,

The club can cover the bond interest so and they have dividend rights already. Bond interest is tax deductible (the debt is subsidised by UK taxpayers) so what you propose wouldn't make much sense financially.

SaneLynch,

Maybe 1m at £100 is totally naive, but it is worth finding out!

anders

Anonymous said...

Anders - But if they are keeping the bonds going til 2017, but paying themselves the interest money (Because we would own the bonds after buying them all back), surely it's still tax deductible?

Mike

andersred said...

Porrig,

Sorry for missing your questions:

Taking them in turn:
1) How do we buy shares in another country (never bought shares in anything before)?

It's doable through a bank or stockbroker but isn't easy and is better done using a collective mechanism organised by MUST.

2) Are there any traps/obstacles to be aware of to ensure fans get the best possible deal when investing in the club?

Yes many. The primary one being not to pay a ridiculous price for shares. That's why we need a lot more information about this possible flotation first.

3) To have a collective holding surely we need to be grouped together under one entity (with one main spokesperson) - how best can we form this group, given how fractured our support is and how emotive the issue is?

MUST is the clearly logical organisation for this role. My appeal to unity was more about seeing whether we can build a consensus among the fanzines, FCUM etc about supporter investment after any flotation. Hatchets (and hammers) need to be buried.

4) How do we reach out to those supporters who don't read blogs, fanzines, twitter, etc? Can we get any real support or acknowledgement from the mainstream press for fan driven efforts?

Once we have a plan then yes, we need to reach out to reds everywhere through all possible means.

Hope that doesn't just raise more questions.

anders

Anonymous said...

Anders - I know they can take dividends as well as pay the interest, but obviously they wont do this because they cannot afford to, it would obviously be too damaging to the club.

People I have spoken to believe they are planning on buying back the bonds. What do other guys in your field believe they will do like Swiss Ramble etc etc?

Mike

andersred said...

Nobody knows for certain. My point was that £45m of interest costs £33.3m after taking into account the tax shield whereas £45m of dividends costs £45m.

Furthermore capital gains in the US are very lightly taxed vs. (dividend) income.

If the Glazers want to extract value that makes a debt for equity switch unattractive however good it would be for the club.

Thankfully any IPO prospectus will have a section entitled "use of proceeds" or something similar so we will know!

anders

Anonymous said...

Anders - Another lad I know believes they will pay off the refinanced PIKs which are rumoured to have been borrowed from Chartered Standard (Liverpool's sponsor). Whilst the rest will pay off one of the two tranches. Is that correct? Is it true that half of the bonds are in dollars and the other half in sterling?

Could they settle one of the tranches?

Mike

Darren said...

My guess is that the proceeds from the IPO would pay down the Delaware debt (£250m+). They will then pay themselves a dividend to pay themselves back their original stake (c£270m?). Hey presto, the Glazers have got the club (albeit only a 70% share now) for nothing and they've removed "their" debt in the process. The bond debt will remain in place (it can't be repaid for another couple of years anyhow can it?), though I imagine they'll use a good chunk of the cash in the bank to buy back some more as they have in the last year. It really is a swindle of epic proportions.

JIM said...

Hi Anders,
What has the bond prospectus to say about public equity offerings?
I believe that some 35% of the bonds can be redeemed at par or thereabouts (prior to 2013) in the event of an equity offering- cheaper than market value. With a strong strike price, a 25% sell-off
(together with some carveout cash) could take out 35% of the bonds and leave enough to deal with the Delaware debt.
Surely not removing at least some debt from the balance sheet- a recent trend with LBO offerings will be viewed negatively by potential investors; I guess we need to see Use of Proceeds in the forthcoming equity prospectus. I understand your point about taxation notwithstanding.
I agree with Darren above. Some proceeds will head yonder stopping off at Delaware to pay the PIK replacement debt. Any chance both events are connected? The pik replacement debt being convertible to equity on terms agreed in advance of an equity release? The conversion rate would change in line with the strike price.
Not to throw a wet towel on this unity business, but I'd be quite hesitant to get an equity stake in quick. Fergie's retirement looms- perhaps the knowing Glazers are anxious to go public in advance. United without Fegie is a whole different kettle of negative fish and the stock price will reflect this the moment his retirement is announced.

Great blog by the way.

Cheers
Jim

JIM said...

I should add that I am not dissing the notion of fan ownership or a fan stake; rather if fans collectively want to maximise their stake then from a strategy point of view it would be best to wait for the predictable sell-off follwing from Fergie's retirement.

Jim

NobbyStilesDentures said...

Anders - like your analysis, but wanted to ask a couple of questions.

(1) Whats the outstanding on the debt and PIK's now - we don't know what the capital and rolled up interest was at the refinance I guess, but it must be somewhere in the order of £650m. Maybe the IPO pays off the Debt and PIKs, leaving the club to run its business on free cash flow moving forward, less dividends based on its reserves, (i.e. what it can afford to pay), not what it must pay contractually via the bond indenture, what a result that would be, right?!

(2) Essentially the Glazers are hoping to capitalise on a silly valuation. The club should be valued at a premium to Arsenal, so maybe 18-20x given the clubs potential to drive improved DCF going forward. Difficult to say without seeing the input variables right?

(3) the Glazers will take the markets IPO money and still end up with a better value than the club was worth when they bought it originally. So the market pays for the financing, not the club, and the market maybe happy due to a forward looking DCF analysis - £2bn+ is way too much -plus your Ebitda multiple assumes the debt is not repaid, when it may well be?

The market will need to be convinced that a large valuation is correct here - its not an exact science as we know, Comps, DCF etc, but £1.6 - 1.8bn sounds more like it in my mind.

I am so looking forward to holding shares again, I hope they make that possible for the fans and begin to win some credence back.

fletchtm said...

Andy. Excellent analysis.
You mention that the Glazers have not been taking their dividend, which obviously helps the club, after payment of the 45M annual burden. So my question is whether the Glazers could use all of the funds raised to sort their own houses without hurting the Club. i.e. no change and the club continues to service the 45M but no additional burden from the risk of the IPO

Alejandro said...

I don't know if the rumored valuation is accurated or not. But given those of Arsenal (14.6 x EBITDA, 6 years in a row without a trophy) and Liverpool (11.4 x EBITDA, without Champions League money this and last seasons) I don't believe is excessively over the mark. Success on the pitch has been a key factor for the commercial success off it.

Anonymous said...

There is rumour in HK that United changed the plan of listing in HK to listing in Singapore because the Stock Exchange in HK refused to exempt United from the prohibition of issuing A share and B share with different voting rights. But both the HK and Singapore Stock Exchange are prepared to exempt United from the requirement of disclosing major acquisitions (ie football players). Not sure if the above helps your analysis.
Good blog, by the way.

ja said...

I think it is wise to wait until the prospectus is published and then read the small print. However, it will be interesting to see the new argument from the Glazer apologists who maintained that delisting made life easier for the club because they could act quicker when necessary. Though the Glazers dragged out the Berba transfer all summer till the last minute and seem to be doing the same with Sneijder.

Shane said...

I would definitely be more than willing to commit at least £100 should the opportunity arise.

I look forward to developments.

Anonymous said...

Here's a scenario: let's say the Glazers still effectively owe £200m on the loan they took out to pay off the PIKS. Say the IPO raises £500m - that allows the Glazers to pay off this loan, pay off £200m of bond debt (as a gesture to the fans) and pocket £100m for themselves.

But to get a big valuation they surely have to pay dividends (would you buy at those prices looking for capital appreciation?). A 3% yield means £15m dividend payment, which would wipe out the savings on the bond interest.

So the club's financial situation is unchanged. Only the Glazers benefit.

andersred said...

Hi Anonymous @ 13.05,

Yes, dividend payments are a risk as you say. See my new post on the subject.

anders

Anonymous said...

I think you should be putting this info out on the footie forums.SportsWitness in particular as it reads like glazer cheerleaders convention on it at the minute.

tigernomad said...
This comment has been removed by the author.
Mark Benson said...

Quite a spectacular opportunity to get involved with a football club your a fan of and being a part of it. Another great reason to take flights to Singapore among the many tempting ones.