Beautiful game's ugly finances will put investors off Man Utd
According to London's Sunday Times newspaper, the owners of Manchester United are planning to float the much-loved football club on the Hong Kong stock exchange in a deal that could value the club at an impressive HK$21 billion.
Don't get too excited, though. Britain's Sunday papers are not the most reliable source of business news. If they were, then HSBC would have relocated its group headquarters from London to Hong Kong at least six times over the last couple of years.
And this particular story had about it the strong whiff of an investment bank plant. No doubt an investment bank is indeed trying to interest the Glazer family, which owns Manchester United, in a Hong Kong listing. And in an attempt to impart a little extra momentum to their pitch, no doubt the bankers leaked the story to The Sunday Times as if it were a done deal. This happens all the time. It doesn't mean the offering will go ahead.
Still, you can follow the thinking. The Glazers have long been said to be looking for a profitable exit route from their 2005 investment in the club. And given Manchester United's enduring popularity and sky-high brand recognition in Asia, investment bankers would certainly try to persuade them that they could get a better valuation by floating the club in Hong Kong, rather than on the London stock exchange.
But while Hong Kongers like to put on their red shirts and watch the team's matches on cable, it doesn't follow that they will automatically jump at the chance to buy shares without first taking a long hard look at the club's finances.
At first glance, those finances look pretty impressive. Over the 2009-2010 season, the club generated GBP286 million (HK$3.61 billion) in revenues, split roughly equally between television income, turnstile takings and commercial revenues from sponsorships, kit sales and the like.
That's enough to place Manchester United third in the global 'money league' of football clubs compiled by accountancy firm Deloitte, behind Real Madrid and FC Barcelona (see the charts above).
Unfortunately for potential investors, at Manchester United big revenues do not translate into fat profits. Part of the trouble is the eye-watering costs of attracting and keeping star players. Over the first three months of this year the club paid out GBP35.5 million in wages and other staff costs. Add in the cost of amortising players' transfer fees, and personnel-related costs ate up some 60 per cent of the club's GBP75 million in revenues over the quarter.
Even so, the club still managed to generate a slim operating profit over the three-month period.
But Manchester United's big problem is servicing the GBP478 million debt run up by the Glazers to purchase the club. Interest costs in the first quarter of the year came to GBP11.2 million, which left the club sitting on a loss for the three-month period of GBP5.9 million.
That actually looks quite modest compared with the ?66 million loss the club took over the same period last year, thanks largely to currency and interest rate swap losses.
But even so, despite a sterling performance on the pitch which saw the club lift the English Premier League trophy and progress all the way to the final of the European Champions' League, Manchester United looks on course to record another loss for the 2010-2011 season.
Of course, a stock market flotation - assuming the club could bypass Hong Kong's profitability requirement - could help Manchester United pay down some of its debt, reducing its interest costs.
But that doesn't mean there will be any profit left on the table for investors in a share offering.
To compete in the top level European competitions which generate the highest broadcasting and gate revenues and bring in the most lucrative sponsorship deals and merchandise sales, football clubs must sign up star players, which is astronomically expensive.
For example, according to one report at the weekend, Real Madrid striker Cristiano Ronaldo now believes himself to be worth GBP150 million in transfer fees, plus GBP400,000 a week in wages.
That is surely an exaggeration. But even so, it demonstrates how runaway inflation in player costs will wipe out any profit that top-flight clubs can hope to make, even if they can reduce their debt burden. Once the stars have been signed up and paid for, there simply won't be anything left for shareholders.
So although the idea of a Hong Kong listing for Manchester United might make an attention-grabbing story in a Sunday newspaper, local investors here are unlikely to be impressed.