Friday, 19 August 2011

Some more thoughts on United's Singapore IPO

Now that the Glazers' plans for a partial flotation of Manchester United on the Singapore stock exchange have been confirmed, here are a few more observations.

Some of the proceeds will be used to pay down the club's debts - good news but we need details

The club and its bankers are briefing journalists that some of the proceeds from the IPO will be used to repay some of the club's debt. The Telegraph even suggests that the family have realised that the debt burden is hampering the club's ability to compete in the transfer market.

This is an extraordinary turn around in my view, with the club and its owners apparently finally falling in line with the view of supporters! It also stands in stark contrast to the evidence David Gill gave to the House of Common Select Committee on 8th March 2011 (my emphasis):

David Cairns MP: "There can’t be any ambivalence about this. Obviously it would be much better if Man United was not carrying those levels of debt and servicing them, surely?"
David Gill: "In isolation, yes, but there is no issue in terms of asking whether Manchester United has been hampered in terms of what we have had to do as a club in respect of investing, as you quite rightly say, in facilities, players or player contracts. I personally believe that there has been no impact in that respect."

The devil will of course be in the detail,with the following areas particularly important:

How much will the IPO raise?
The BBC suggest between £400m and £600m.

How much of this will actually be used to pay down the club's debt?
Will we have to wait for the prospectus, expected to be published in six to eight weeks time. To make a real difference to the cash flow, a substantial amount would need to be paid down, £200m+. Debt repayment reduces the interest bill but increases the corporation tax bill so this will have an impact too.

What will the club's policy on dividends be?
This is crucial as paying down debt and reducing the £45m interest bill doesn't improve the club's financial position if interest payments are just replaced by dividend payments. The club does not have to pay dividends post flotation, but twenty eight of the the thirty companies in Singapores's Straits Times Index (the "STI", the equivalent of the FTSE) do. The STI yields over 3%. If United had a market capitalisation of (say) £1.2bn, and yielded 3%, that's an annual dividend bill of around £36m.


Looking at valuation

When considering the success of the IPO, its impact on the club and whether fans can or should invest once the shares are listed, valuation is key. I apologise if what follows gets a little technical.

When I wrote about valuation in my post on Wednesday I compared a suggested EV/EBITDA multiple for United of over 21x (on the basis of no debt repayment) to the 14.6x paid for Stan Kroenke for Arsenal. Whilst United may or may not deserve a premium valuation to Arsenal (and you have to ask which club has the most upside in improving its commercial operations in the future), it is worth noting the Kroenke was paying for control of AFC in a contested situation. In such circumstances one would expect to pay a premium price. The United IPO will be an offering of minority position, a very different situation.

I thought it might be useful to look at possible valuations in various scenarios. 

Using some IPO proceeds to repay at least some of the club's debt impacts on valuation itself when looking at measures using "enterprise value" (i.e. debt plus equity). What is in effect happening is that debt is being swapped for equity. The briefing to the press has suggested the Glazers are looking to raise £400-600m, a huge range. I have assumed 2010/11 EBITDA of £110m (we will know the exact figure in October). It is worth noting that 2010/11 was a very good year on the pitch and the media income earned from winning the league and reaching the Champions League final cannot be assumed to recur in the future!

The charts below show the EV/EBITDA valuation in two scenarios, a flotation of 1/3 of the club for £400m and for £600m and how various levels of debt repayment impact the valuation. I have deliberately kept the scales constant.


In Scenario A above, 1/3 of the club is sold for £400m, implying a market capitalisation of £1.2bn. If all the proceeds are used to repay the £400m of net debt, the club is debt free, has an enterprise value of £1.2bn or around 11x 2010/11 EBITDA. By contrast if only 25% (£100m) of the net debt is repaid, the enterprise value is £1.5bn or 13.6x EBITDA.



Scenario B above shows the same process but at a far higher IPO price with 1/3 of the club sold for £600m, giving a market capitalisation of £1.8bn. In this scenario, even if all the debt is redeemed, the EV/EBITDA multiple is still 16.4x and if only £100m is repaid, it's a very punchy 19.1x.

Discounted cash flow ("DCF") valuation
As I have said before, EBITDA is not a particularly good measure of a football club's profitability. Below EBITDA comes transfer spending which can be very significant. In 2010/11, net transfer spending equalled 30% of EBITDA. A more rigorous valuation method is to look at free cash-flow after transfers and capex. Assuming annual net spend on players and infrastructure of £35m, unlevered free cash-flow is around £65m (assuming only £3m of cash tax is paid, a low rate than cannot be relied on indefinitely). 

DCFs are notoriously bad predictors of value, but a simple two stage model growing free cash at 10% per annum to 2015, then 5% to 2021 with 3% perpetuity growth and a 9% discount rate gives an EV of £1.5bn (so a market cap around £1.2-1.3bn assuming some debt is left in place). If that sort of growth rate only justifies a valuation at the lower end of the range, the higher prices mooted rely on some very heroic assumptions.

There will no doubt be further twists and turns in this story in the weeks to come. I will endeavour to keep readers up to date.

LUHG


30 comments:

JIM said...

Hi Anders
A lot of assumptions in the DCF approach! Any fair value estimate for equity arrived at by this method will probably underestimate the MC that emerges at flotation.
There is simply no objective method (or set of assumptions) for arriving at an indisputable FV for the club.
My hunch is that a lot of the valuations muted in the press (particularly in connection with the Qatari takeover rumours) were deliberately placed with the aim of establishing a perceived benchmark price in the event of an IPO.
We know from the bond prospectus that 35% of the bonds can be redeemed at par or thereabouts in the event of an IPO. There are indications that some of the proceeds will deal with the bonds; 35% of the bonds translates to 170m of proceeds; but what happens to the remainder of the proceeds? The lower figure of 400m leaves a sizeable remainder of about 230m. A figure that is reminiscent of the PIK debt (and its replacement).
Hmmmm!
Any chance that RF LLC in Delaware houses pre-IPO convertible bonds? Debt designed to convert to equity at a discount to strike price on flotation. Such placed shares wouldn't be part of the general circulation. Well, I guess all will be revealed soon enough.

A few small things (and they are small things):
I believe that directors typically have to repay any outstanding loans before the IPO. I guess we'll be getting the 10m (plus interest) back any day now.
Who actually pays the IPO fees? Fees up to 5% can be substantial.
Cheers
Jim

andersred said...

Hi JIM,

The DCF was illustrative only! All these straight line growth models are crap at the end of the day.

This is the actual enterprise FCF in the last 4 years:

06 -£13m (quadrant costs)
07 £61m
08 £46m
09 £70m (or £150m inc CR)
10 £66m

Find a trend in that....

I agree a 35% bond redemption is logical and indeed, big coincidence, that's enough left to repay the 3rd party refinanced PIKs (remember they owned a chunk themselves). The convert idea makes sense too.

The directors' loan rule would depend on SGX listing rules I imagine.

Not sure on fees in Singapore. In a UK IPO it's the company.

anders

Andy said...

Hi Andy.

I've seen the comments else where about the share offer only being open to institutions and not individuals. So are talking about only the institutions themselves being able to buy shares or is there the possibility of the institutions will be used as some kind of middle man? If that was the case of the first one, isn't more of a private share sale with the Glazers selecting who they want to buy the shares. I can see why a large financial institution would want to invest in Manchester United bonds for the large amount of guaranteed interest they'd gain out of it but shares in a football club out of Singapore? Has a large financial institution ever brought shares in a football club before? I can't honestly imagine a large European or American Bank buying shares in Manchester United. Can you imagine that in the news. 'Lloyds buys into Manchester United.'

Anonymous said...

Anders

Going off something you've mentioned before and maybe a little point of yours before - Could this listing be a way of paying themselves a dividend each season through buying the shares through another one of their companies?

Anonymous said...

I believe they will pay off the refinanced PIKs and they will pay off one of the two bond tranches. But my question to Andersred or anyone who will know the answer is, would it be better to pay off the American or English bond? Either the one set up in dollars ($425m)or the one set up in sterling (£250m)?

Paying off which one would benefit the Glazers more? Thanks in advance.

Mike

nobystilesdentures said...

Fwd US$ trend is for the currency to depreciate versus Sterling. This is primarily due to deficits running in the US and the amount of cash being repatriated internationally as more and more US businesses are owned by foreign entities. Not sure what currency the PIK is in, (post refi / or whether it is still PIK?), and what currency the IPO is being raised in - there maybe swap costs somewhere to build in, but I would repay sterling now.

It makes sense to maintain a blend of debt and equity going forward as its cheaper to hold some debt due to the tax shield (offset interest against tax), to maintain a healthy cost of funds. Holding all equity will be more expensive as the club will pay corporation tax on all profits whilst only saving £8-9m in bond interest according to Anders analysis, which maybe flawed depending on input variables - not many will understand this and want all the debt repaid - surely this is better, no its not!

We need to see the prospectus to do some real work on it.

Concerned Red said...

Hi Anders

This is a crunch time for all of us. No apologies for saying how much I loathe and detest the Glazers. The only favours they will do will be for themselves. As you do your analysis on the unveiling of the prospectus and on assumption that all in the garden is not rosy, can you post this out in Singapore. I believe it is in Manchester United Football Club's interest ( not the glazers )that the public are made aware of how bad a deal this is and they should not participate. There is of course another scenario which is being played out in the world financial markets and in 2/3 months time the world economy could be a million times worse than what it is now. Imagine the borrowed money used by the Glazers to publish the IPO briefing lawyers etc and then finding there is no appetite for this IPO and we are back to square one. What goes round comes round eh!

Anonymous said...

what happen if more than 10 people offering glazers 200 million pound for 10% shares in the club...glazers will reach their 2billion pound asking price quiet easily.

there is no guarantee that they will pay down the club debt.

is there any agreement about debt..debt is on manchester united not on glazers..

Anonymous said...

Anders, Thank you for another brilliant article. The comments by Concerned Red sums up exactly the concerns/frustration many of us have .This family are holding our club ransom because of what I call their selfish dream/fantasy when they got hold of United using mostly borrowed money. They thought that by "maxxing" the Utd brand ( e.g. such as the recent tour to the US and the visit to the White House plus the PL trophy tour of the East) and bringing in policies , similar to that of the Bucs, such as low wages plus more emphasis on promising players,they could eventually pay off most of the debt.The Glazers may even have hoped that Utd would eventually do a separate deal for tv / broadcast ( similar to Real Madrid and Barca)and that in future, massive profits would be generated by more people would take to watching live games on mobile phones or by use of other technology .(This last bit I remember The Manc Red Devil tried to use as some justification of the Glazer ownership when he was defending them on here) And on top of this, merchandise sales , ignoring the fake shirts etc.I think the Glazers may have woken up to the fact that heavy expenditure to maintain the success of the Utd "brand" will be needed in the near future, because people are interested in a winning brand, not a losing one, and that they cannot expect Sir Alex to keep pulling off miracles with the current team. Actually, our midfield situation may have woken up some supporters who claimed the Glazers were actually good,benevolent owners etc, and that they never interferred, never refused Sir Alex funds etc.The Glazers, by bringing in policies and emphasis on new players being 26 years old ,resale value etc, ,dragging on decisions about players futures plus attempts to further lower wages, do interfere.. Chris-NZ

Anonymous said...

Hi Anders,

Apologies for my total lack of anything financial, and I hope you don't mind if I ask a question.

If when the Glazers are putting up the 25% of the club (or whatever the share is), is it true that they must inform us of what their intention is with that money? And they must then stick to it?

Again, thanks for the great blog. Although I'm not very educated in financial areas, I really like your dedication in helping some of us understand.

Keith

andersred said...

Hi Keith,

Yes they will have to say what they are doing with the money. As for sticking by what they say, it'll be very clear whether the money flows out of the club or is used to pay down bonds.

There won't be any confusion...

anders

Stojan, Yugoslavia said...

Hi Anders, great blog as always.

Is it better to pay interests or to pay dividends...? What is the worst scenario for the dividends - how much money the new shareholders could take from club annually, if they pay, for example, 600m for 30% of the club?

Anonymous said...

Anders,

Isn't the origin of the shares to be sold into the offering the key to how the proceeds will be used? Unless some of the Glazers' shares are sold into the transaction it's hard to see how the proceeds could conveniently be extracted from the club to pay down your assumed PIK refinancing. If the shares sold are all 'new', then one has to presume that the proceeds will be used internally. (I assume that the 'new' and 'old' shares will be of the same class.)

JIM

As with all IPO's, no one 'pays' the fees. They are embedded in the discount at which the underwriters buy the shares from the issuer. Of course this means that the issuer bears the costs through getting less than 100% of the issue proceeds - so if the shares are 'new', the company bears the costs; if the shares are existing 'Glazer' shares, the Glazers will bear the costs.

Chris, NZ

For the Glazers' first five years as compared to the plc's last five, wages and salaries rose from an aggregate £354 million to an aggregate £564 million - that's an increase of £210 million (or £42 million a year). Couple this with the average £12 million a year increase in transfer spending and, even when you balance it with the £17 million increase in proceeds from player sales, you get a net increase in expenditures on players of £35 million a year as compared to the plc. You can accuse the Glazers of many things, but running the club on the cheap is not one of them.

Anonymous said...

Oops, forgot - issues in the UK often (usually?) aren't underwritten. (Is this still the case - haven't been involved in a UK offering for 30 years so I'm a bit rusty?) Regardless, so far as I can see, underwriting is the normal practice for a Singapore IPO, so my remarks on who bears the costs should stand up.

Pundit said...

Is there nothing in the bond prospectus REQUIRING a paydown of the bonds in an IPO situation? We talk above about a 35% paydown being an OPTION but isn't something required. My history is in LBO bank debt where that would be the case (typically 75% of IPO proceeds would be required to be used to repay debt). Whilst I understand a little about bonds and that they are less restrictive than bank debt I would have thought that on this point we are back to basic principles in that if you float you reduce leverage before doing anything else (ie paying dividends).

Regards
Tom

Big Swift said...

This is my 1st post and I'm in no way a financial expert and my figures are very rough.

Glazers purchase the club for £800M using £500M borrowed money which became the bond issue, spending no more than £300M of their own funds.

Ultimately, they float a 30% stake in the club valued at £1.8M raising £540M. The funds raised are used to buy back bonds and they are left with 70% of a £1.8BN business. They hold a shareholding with a value of £1.26BN for an outlay of £300M.
Is this too simplistic ?

K Stand Season Ticket Holder

andersred said...

Sorry for not replying to comments yesterday. Too much work and then the match got in the way.

Stojan,

It is cheaper to pay £1 in interest than £1 in dividends because the latter attract tax relief. We don't know what dividend policy will be after the IPO. The bond covenants limit dividend payments to an (infamous) one-off £95m and then not more than 0.5 x (EBITDA - net interest) thereafter. Redeeming bonds would reduce the net interest element, so post a 35% buyback (as mooted by earlier posters), you'd be looking at a permitted annual dividend of around £40m. I would say that was very much a worse case scenario to be honest.

Anonymous yesterday at 18.00

You are quite right, if the Glazers sell existing equity the cash goes to them (most normally seen when a private equity firm partially or fully exits from a company). If new equity is issued by Red Football Ltd (or whichever company is listing), those proceeds go to the company (diluting the Glazers' 100% holding). Will they be the same class? You'd hope so, but maybe the Newscorp or Google structures look appealing too!

I totally agree on fees and yes, I imagine they will be underwritten (once sub-underwritten of course in normal "why is hedging this limited risk so expensive?" fashion...)

The running MUFC on the "cheap" argument is a difficult one. Costs have risen but by less than industry averages. The proportion of EBITDA reinvested in squad or physical capex has fallen.

anders

andersred said...

Pundit,

The only paydown requirement under the bond covenants is in the event of a "Change of Control" which means sale of over 50% of the equity. The bonds are "cov light", hence the 8.5%+ coupon!

Big Swift,

You're maths is correct. The process you described is "how to make money from a leveraged buyout". The club has paid c. £400m in interest and banking fees to achieve that alchemy for the Glazers!

anders

s7_rocks said...

why would an investor wan't to invest in such a overvalued deal?United are not worth a penny more than £1.2 billion and the dividend payment would be around 1.5% on initial investment(If they even pay dividend).If United are Valued at £1.2 billion and if glazers take entire proceeds from IPO for their personal use than the 30% of club shouldn't be worth more than £250 million considering enterprise value would be around £800m.Andy would you invest in such deal if it wasn't United?
-S7

andersred said...

Hi s7_rocks,

Why would an investor want to invest in an overvalued deal? They shouldn't and I wouldn't invest in an overvalued offer either.

We need to see what valuation they IPO at and where the shares trade in the aftermarket.

Let's see.

anders

Anonymous said...

Anders, I have just read on the IMUSA site an article today (29 Aug)that Utd chose Singapore for the IPO so that it could have a dual share structure(one with voting rights and one without) which is claimed will allow the Glazers to retain effective control of the team..)Any comments on this. Also, my thanks to you and Anonymous 22 Aug. 18.00 regarding my concerns/frustration at possibility of team being run on the cheap.. Chris-NZ

Matt said...

anders/S7

I may be wrong about this, but when the Glazers paid £800m for a football club I believe operating profits were about £50 million per annum (£46 million over eleven months from 31st July 2004 to 30th June 2005 in the last annual report). So the Glazers paid 16x EBITDA. If the reports of £110-115m EBITDA for this year are to believed, surely that would justify a value of around £1.8 billion?

Admittedly that is a very basic estimate, and the potential for revenue and earnings growth is not as much now as it was then. But then most people who buy football clubs seem do it as a luxury or status purchase rather than as an attempt to make money, which implies that rational valuation models may go out the window.

Anonymous said...

Anders,
A couple of questions:
Does the proposed dual share IPO make it less likely that the Glazers will take proceeds from the float? The dual share structure makes the IPO less attractive to investors and using the proceeds for personal use would make it less attractive still.
What about those careveouts though? I'd imagine it unlikely that The Glazers will pocket the 95m post IPO. There will be other shareholders. Might it happen before the IPO (and be detailed in the prospectus)?

Thanks.

s7_rocks said...

@Matt When Glazers took over United they had to pay over the odds because it was a hostile takeover and many shareholders were unwilling to sell.The potential for growth was high back then and the revenue has doubled since the takeover but i can't see the similar growth in revenue in future because and the individual telecom deals and Training kit Sponsorship reeks of desperation.

Matt said...

@s7, I'm not sure why you say they reek of desperation. The individual telecom deals are the kind of thing that Bayern, Real and Barca have been pursuing for years, and are the reasons they have been so far ahead of us in commercial terms. And if the training kit deal was an act of desperation by the Glazers, how did they get the same amount of money that City got from their main shirt sponsorship, despite their deal being a potentially inflated related party transaction?

Your point about the hostile takeover is a good one tho, and I do concede that. Although again, I guess it all depends on whether investors will be looking at the deal as a financial investment, a way to get a piece of the club, or even a step on the road to a future takeover of their own.

rafflestiger said...

Anders,
Another excellent piece!

Concerned Red's point about imminent market collapse seems as good a reason as any for haste; Andy's mention of only institutions participating in the IPO could also be key.
A rather curious (and long) article on the asia times online website http://www.atimes.com/atimes/Southeast_Asia/MI03Ae01.html
makes some interesting points about what might or might not be mentioned in the prospectus, notable in relation to the recent Asian deals, and points to some (at a stretch) interested parties in the region that possibly support the institutions-only theory. Your thoughts?

Suressh said...

There is a report in todays papers in Singapore where the CEO of the Singapore exchange has (finally) come out with an unequivocal statement that the exchange will not permit dual share listings. So the issue still remains, why are the Glazers looking to list in Singapore?

Anonymous said...

There are several reasons why the Glazers would list in Singapore.
1. The Singapore Bourse (SGX) tends to be very speculative and not very sophisticated. In the past, a number of China listed corporates listed in Singapore instead of HK, Shenzhen or Shanghai. After listing, a number of them came unstuck - some immediately after listing. Even Singapore REITs in the past had been pushed beyond their market values in the property portfolio which lead some to question the sophistication of those REIT investors.
2. The Singapore currency is exceptionally strong vis-a-vis commonly traded world currencies like US$, UK£ & Euro€. The Singapore Government keeps the SIN$ within a tight range (Dirty or Managed Float) of a basket of world currencies. As S'pore is an open economy, the Gov't allows a certain % of appreciation in order to keep inflation down as most of S'pore needs have to be imported. Appreciation is possible since capital inflows far exceed outflows as the below point highlights why.
3. The presence of Swiss-type private banking facilities. S'pore have been known as the Switzerland of the East as the system allows discreet banking secrecy for clients. A lot of wealth passes through S'pore both directly & indirectly. One of the reasons is that S'pore is located in a region where corruption is common in many resource-rich &/or politically unstable countries. Wealth is keep in S'pore where a stable Gov't ensures that as long as gov't taxes and fees are paid, the investor has no fear of appropriation.
4. The presence of Casinoes in S'pore have enhanced the movement of world's liquidity through S'pore. In fact, it is a thinly veiled attempt to allow money laundering via S'pore.
I don't expect some readers to understand the reasons I've stated due to complexity of money flows and currency values. Anyone with a basic economics or finance understanding may be able to grasp the logic.
Cheers!

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