Thursday, 5 July 2012

The Manchester United IPO some initial observations

There’s been a lot written about Manchester United’s proposed listing on the New York Stock Exchange (“NYSE”) since it was announced on Tuesday night by the filing of an SEC Form F-1 (the document is available here), this post is designed as a brief summary of my thoughts on the subject.

This is a massive change in strategy by the Glazers and a positive one financially
Since the takeover, the club have insisted that the debt loaded onto United is not in any way a problem. As recently as last March, David Gill was reiterating this to the House of Commons Culture Media and Sport Select Committee.

Suddenly, the attitude to debt has changed. The SEC filing clearly states:
We intend to use all of our net proceeds from this offering to reduce our indebtedness
The Glazers do not need to take this approach, they could float United and retain the proceeds themselves. The fact they have chosen not to do so is very telling and has the potential to transform the financial position of the club. As I have mentioned again and again on this blog, over £500m has been spent on interest, debt repayments, fees and derivative costs since 2005. In the first nine months of the 2011/12 financial year alone the club spent £71m on interest and bond buybacks. The elimination or significant reduction of these costs is huge news.

The other key aspect of this debt reduction is that the prospectus makes it clear that there is no intention to pay dividends in the forseeable future. Interest payments will not simply be replaced with dividend payments.

The 2010 bond issue was supposed to lock in long-term (seven year) funding, and yet only two years later, that entire costly structure is being ripped up.  A major change of heart has taken place.

The family can still cash in some shares under the "over allotment" mechanism
Although the prospectus says all the net proceeds will be used to reduce debt, the family can still sell some of their shares (as opposed to the new shares in the main offer) under the "over allotment" option. This is a feature of many IPOs, whereby the owners make additional shares available for sale if demand is higher than expected. Over allotment is not normally for more than 10-15% of the shares being offered.

At this early stage we are missing some very key details
The SEC filing is a “preliminary prospectus”. It contains no details on the number of shares being issued or the price of these shares. It is subject to revision.

The success or failure of the offer will have a lot to do with the valuation the offer puts on United. In the past, the Glazers have appeared to have placed a higher value on the club than most analysts or potential buyers. The FT recently reported that Morgan Stanley had left the IPO syndicate (of underwriters) because of disagreement over the valuation.

It is not too late for this offer to collapse spectacularly if the Glazers attempt to sell shares on too high a valuation or if financial markets weaken further. This is not a “done deal”.

The share offer will be significantly greater than $100m
The much quoted “$100m” issue is a red herring. There is a requirement in a preliminary prospectus to estimate the cost of registration fees and as these are dependent on the size of the share offer, a “placeholding” assumption has to be made. That is where the $100m figure comes from. It is not a guide to the size of the eventual offer. There is little or no point raising $100m (£64m). The exact amount raised will depend on the valuation placed on the company and the state of the markets in the next few weeks but I would expect at least $300m.

This is not a change of ownership
Sadly for those of us who want supporters to have a meaningful stake in Manchester United, this IPO is of virtually no use at all. The “A shares” on offer will only have very limited voting rights. Even if the Glazers sold 90% of the club in the IPO (which they won’t), the “B shares” the family will hold would still have a majority of the votes as each B share has 10x the votes of an A share.

Non-Glazer shareholders will therefore have virtually no influence over the club.

This remains a very short-sighted and depressing approach to governance. The experience from Spain and Germany shows that supporter participation in ownership is a huge plus for football clubs. United’s unwillingness to engage with supporters as anything other than potential customers remains an enormous problem that can probably only be solved by intervention by government.

They’ve chosen New York rather than London because they want to maintain control
The principal advantage to the Glazers from listing in New York rather than London is that the A/B dual share structure is acceptable in the US and not in the UK. Well known companies such as Google, Ford, Facebook and (infamously) News Corporation all have dual voting structures. It would be very hard to float a company with such diminished voting rights for outside shareholders in London.

The downside of US listing is the higher tax that the club will have to pay. United has been UK tax registered for all of its existence but will now be subject to US Federal Income tax on profits at the high rate of 35% (the UK rate is 28%). The fact that the Glazers are happy for the club to pay a higher tax rate tells us a lot about the importance of the A/B share structure to them.

Is this all about a post Fergie world?
Why is this all happening now? We can only speculate, but it seems to me that the Glazers are preparing for a Manchester United without Sir Alex Ferguson. As we know, the club has achieved great success on the pitch on a pretty low transfer spending since 2005. Would another “big name” manager come on board with this limited budget, especially as City, Chelsea, Real Madrid and Barcelona continue to flex their financial muscles?

What happens next?
The underwriting banks and the company will now undertake a road show for potential investors. United have ninety days from the date of the preliminary prospectus to file their “final prospectus”, which includes the price and number of shares being offered. The IPO can still be cancelled at any time prior to this….

Watch this space.