Partly a beautiful game

If they wear their mercenary hats, there is only one question investors need ask about Manchester United (US:MANU) in particular and quoted football clubs in general following last week’s hype and hysteria surrounding the shock conception and ultra-quick abortion of the European Super League: does the combination of passion and filthy lucre revealed by that project make ManU’s shares a compelling investment? Probably not; though how that conclusion is reached tells us more about investing than the assessment itself.

The explanation starts with Charlie Frobisher, a senior partner at the City broking firm where Bearbull was a lowly analyst on the consumer-sector desk in the early 1980s. Charlie owed his success to his ability to drink clients under the table (this was the 1980s), although his intellectual capacity rivalled that of a gnat. Hence the same question whenever he passed the consumer desk in an agreeable frame of mind (ie, he had just generated bucket-loads of commission): “How much extra profit would BATS make if everyone in India smoked five cigarettes a day?”

The analogy with the elite-level football today isn’t a million miles away. Recall what Warren Buffett once said about the tobacco industry: “I’ll tell you why I like the cigarette business. It costs a penny to make. Sell it for a dollar. It’s addictive. And there’s fantastic brand loyalty.” Even Charlie Frobisher would see that football is the modern-day equivalent of tobacco, except it doesn’t come with the health hazards. Certainly it is addictive and the brand loyalty makes Marlboro man’s efforts look puny. That attracts money makers. Which is why the people who run Man Utd, whose love of money may equal Charlie’s, continually ask themselves an equivalent of Charlie’s question: what would it do to profits if we generated an extra 50p a year from each of our fans?

It is tantalising, even pertinent, when put into context. The club’s bosses reckon United has 1.1bn fans worldwide. Sure, it strains credulity to imagine that 14 per cent of the world’s population are ManU fans. Not, however, if the definition of a fan is much like Mark Zuckerberg’s definition of a ‘Facebook friend’ – anyone with whom you might have had just a passing acquaintance; intimate, the relationship is not. It is the same with United’s fan base. The figure derives from a 2019 market-research project, which scaled up the 1.1bn from a global survey of 54,000 respondents. The survey estimated United had 467m ‘fans’ worldwide (people who said United was their favourite team) and 635m ‘followers’ (those who said they actively followed United in addition to their favourite team).

The objection is obvious – simply saying United is your favourite team hardly demonstrates the commitment that roused so many English fans last week to complain that “We want our windy nights in Stoke”. For United’s bean counters, that is mostly irrelevant. A fan base of 1.1bn means that in 2019-20 United’s £509m of revenue worked out less than 50p per fan. That figure is so pathetically low it is easy to imagine it could be doubled; especially considering the price of a replica kit can stretch to £100. Push an extra £500m through the income account and, with few extra costs stopping that tumbling through to the bottom line, both profits and company value are transformed.

Besides, windy nights in Stoke probably mean little if you are a United fan in uptown Saigon. And that’s important because it is in Asia where United’s future lies, or at least its future prosperity. Much the same to applies to the rest of Europe’s elite football clubs. The market for football in Europe – much like the continent’s economy – is stagnant. The fans are passionate, but their numbers are static.

The same survey found that United had 296m fans in Europe plus Africa and the Middle East, a figure little changed from 2011’s estimate of 263m. America was much the same – 74m fans compared with 72m in 2011. But numbers in the Asia Pacific region (read ‘Far East’) were transformed, from 325m to 732m. Turning those newly affluent fans in Shanghai, Seoul and Saigon into revenue is already happening. They are a big factor behind the surge in United’s ‘commercial’ revenue (see chart below). From being the smallest income stream in 2010-11, commercial has become consistently the biggest. True, huge sponsorship deals – especially with Germany’s kit supplier Adidas (GER:ADS) – have been a big factor. But it is not for nothing that the club’s bosses demand its exhausted players undertake end-of-season tours to the Far East – that’s where the growth in merchandising lies.

And so much more growth if – during Europe’s winters – United can play more matches against other top European teams. Hence the European Super League. Hardly a new idea, it is true, but one to roll out again if chiefly to chip away further at a status quo that still promotes too much competition for the liking of those who already control most of the pie.

Look at it this way: it is true that a few years ago, on a taxi ride heading down to Vietnam’s Mekong delta, I was amazed by the driver’s knowledge of England’s Premier League. Even so, instinct suggests the badge of ‘fandom’ is worn much more lightly in, say, Vietnam – much as it is in the USA – than in the UK, where fandom adopts many of the cultural traits of identity. In which case, 80 per cent of United’s fans worldwide would welcome the super league since it’s more fun to cheer your saccharin allegiance to United when they play Real Madrid twice every season than when they meet Brighton or Burnley. More fun and more profitable than the full-fat British version of fandom, where fans cling to their rainy nights at Turf Moor much as they cling to their half-time Bovril.

The paradox is that, without the full-fat version, the saccharin format of elite football would not be so appealing. But this also means that top football clubs in general and Manchester United in particular will never be as profitable as they might be. Those super profits are close, but always just out of reach.

Indeed, the table shows that, for a company pedalling addiction, United’s financial returns are nothing to cheer. Profit margins are wide enough on average, though subject to much variation and on a downward trend. Margins, however, are of limited use if they don’t feed through to acceptable return-on-capital ratios. Granted, those metrics are hard to calculate because it is rarely clear how much equity capital a group actually employs, but United’s look feeble. Meanwhile, its cash-flow returns are only acceptable if money spent on player transfers is excluded, which, of course, it can’t be.

As a result, its shares have been ordinary performers since the Glazer family listed a chunk of limited-voting stock on the New York exchange in 2012 (see chart below). It is hard to know which benchmark should be the comparator. Use the FTSE All-Share index and United’s dollar price has tracked virtually in line. The underperformance against the tech-dominated S&P 500 is understandable and the comparison with Juventus (IT:JUVE) is unavoidable because it is the only other super-league pretender with a stock-market listing. Despite the surge in Juve’s share price from 2017 to 2019, its struggle to keep up with affluent English clubs has resulted in it living beyond its means.

That is a feature of many top football clubs, which also tells us why United’s shares have limited attractions. Some live beyond their means because they must in order to survive at the top table (also Real Madrid and Barcelona); others because theirs is a ‘sportswashing’ project (Chelsea, Manchester City and, originally, Real Madrid); or because they believe that eventually they will bend the sport’s structure so that it becomes an operation in rent extraction (any club owned by an American who, almost inevitably, sees America’s National Football League as a model for Europe’s top football).

In that, the Americans may ultimately be proved right. Yet currently, that reckons without powerful competing interests. In particular, there are the players; after all, no one ever turned up at Anfield to watch John Henry’s pretty face. Perhaps the players can eventually be bought off. But – like the fans – they want glory, too, and that takes little account of money. Then there are the European fans, especially the English; like chilli peppers in a fiery vindaloo, they give the sport an edge, but they can be hot to handle. Eventually, however, they will be outnumbered. So maybe the American dream will come to pass. In which case, you hold your Man Utd shares – but only on a very, very long-term view.