Elon Musk’s Man Utd joke masks serious M&A logic

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Elon Musk’s Twitter account and the Manchester United logo are seen in this illustration taken August 17, 2022. REUTERS/Dado Ruvic/Illustration

LONDON, Aug 17 (Reuters Breakingviews) - Unfortunately for Manchester United (MANU.N) fans, the world’s richest person is not planning on buying the $2 billion soccer club. Tesla (TSLA.O) boss Elon Musk on Wednesday clarified that he was only kidding when he mentioned the idea on Twitter. Still, there’s money to be made for a patient buyer who is willing to focus more on revenue growth than short-term cash flow.

The northern English team is in a rough patch, both financially and on the pitch. Last season the club finished sixth in the Premier League, missing out on qualification for the lucrative European Champions League. And revenue growth has slowed. Analysts reckon the group’s top line will be lower in the financial year to June 2023 than it was in 2019, using the median Refinitiv estimate.

The common cause of those problems is the owners’ financial strategy. As of September 2021, Glazer family members accounted for half of Man Utd’s 12-person board and had close to 100% voting control through their Class B shares, which carry 10 times the weight of a normal Class A share.

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They’ve saddled Man Utd with debt and taken cash out of the club. The gross cost of servicing borrowings and paying dividends has totalled about $140 million over the past three financial years, according to Breakingviews calculations. That’s enough to buy Liverpool’s star Mohamed Salah, according to Transfermarkt’s valuations. Soccer analyst Swiss Ramble reckons the Glazers have effectively taken $1.4 billion out of the club in total, through dividends, interest payments and other means.

Compare that strategy with Manchester City and Liverpool, whose owners have put money in and focused on investing for long-term growth. That’s arguably kickstarted a virtuous circle of better on-field performances leading to more prize money and fans, in turn boosting revenue. Both clubs’ top-line growth has massively outpaced Man Utd’s in recent years, using Swiss Ramble’s data. The Man City model was validated when private equity group Silver Lake bought a stake in the parent group for an implied valuation of roughly 7 times trailing revenue, compared with Man Utd’s current multiple of 3.5.

Imagine that a financially motivated buyer followed a similar strategy at Man Utd. At a 30% equity premium, they’d pay $3.2 billion including net debt. Assume they funded the whole purchase without any borrowings, and ran the club on a breakeven basis with the same 5% revenue growth that Man City achieved between 2017 and 2021. Man Utd would be worth $6.7 billion after five years, using its crosstown rival’s 7 times revenue multiple. In other words, a buyer could more than double their money, for a 16% internal rate of return. Musk may have been joking, but there’s serious money to be made for someone.

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

CONTEXT NEWS

Elon Musk on Aug. 17 clarified that an earlier tweet saying he would buy Manchester United was a joke.

“No, this is a long-running joke on Twitter. I’m not buying any sports teams”, Musk posted when asked by a user if he was serious about buying the club. His previous post on the social network had stated “I’m buying Manchester United ur (sic) welcome”.

The soccer club’s New York-listed shares initially rose by 17% to $14.90 in U.S. pre-market trading, according to Reuters, before falling back to $13.20 as of 0814 GMT on Aug. 17 – or 3% above their last closing price.

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Editing by George Hay and Oliver Taslic

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