Manchester United may well be the world’s most popular sports franchise, with an estimated 53 million fans around the globe. Until recently, football’s most profitable team seemed destined to develop a similarly passionate following among investors.
They were drawn to the sport because it was a low-cost business with plenty of cash flow, the result of a lucrative television contract signed in 1996 with satellite TV operator British Sky Broadcasting Group. Since then, TV revenues for Britain’s top football division, the Premier League, have more than quadrupled, to £431 million ($688 million) per year, thanks largely to that contract and a subsequent one, signed in 2000. With five league championships in seven years, Man U benefited more than most as its annual media revenues rose to £51.9 million. These balance-sheet victories helped Man U’s stock soar from 50 pence in early 1996 to a high of 416p in early 2000.
Today, however, chief executive Peter Kenyon is hearing more than a smattering of boos from investors. As of mid-February Man U shares have fallen to 119p and might have been lower if not for occasional bouts of takeover speculation. Kenyon is actively courting U.S. investors to try to broaden the company’s primarily U.K. and Irish shareholder base.
Virtually every media-dependent stock is down since early 2000, but Man U has suffered from more than a weak equity market. Much of the new revenue for the team and its Premier League rivals has been swallowed up by costly player contracts. “Football teams have gone from low cost to high cost, spending more and more on players in an attempt to ensure victory,” observes Stephen Ford, a small-companies analyst at London-based stockbrokerage Collins Stewart. At Man U salaries now eat up 48 percent of revenue, up from 39 percent in 2001.
Although the team’s 2002 pretax profit rose 48 percent, to £32.3 million, on revenues of £146.1 million, the improved result came largely thanks to volatile profits from player trading. In addition to offering hefty salaries, the 48-year-old Kenyon, CEO since 2000, has also paid rival clubs league-record transfer fees for star players, both last year and in 2001.
Man U and other top football clubs face the likelihood that domestic TV revenues will start to fall to reflect a slowing global economy. The Premier League is in the second year of a tripartite three-year, £1.32 billion contract (covering broadcast, pay-per-view and interactive viewing) with Rupert Murdoch’s BSkyB; negotiations on a new contract begin this spring.
Man U’s biggest advantage may be that it has the largest foreign fan base of any football team in the world, with 43 million supporters (based on a global poll it commissioned) outside of Britain, 40 percent of them in Asia. Despite this potential overseas market, less than 5 percent of the club’s revenues come from abroad. It falls to Kenyon to find a way to exploit this opportunity.
Born in neighboring Cheshire, Kenyon, is a trimly built, lifelong Man U supporter with a strong Mancunian accent and sparkling blue eyes. Trained as an accountant, he helped turn around British sportswear manufacturer Umbro Holdings in the mid-'90s as the company’s chief operating officer. He joined Manchester United as deputy CEO in 1997.
As CEO he’s made a better effort than many of his peers to restore shareholder confidence -- notably, paying his investors a special dividend last year of 1 penny per share in addition to increasing the club’s regular dividend 5 percent, to 2.1p. Still, the payout wasn’t enough to prevent a roughly 13 percent decline in the share price in 2002.
Over the past two years, three investor groups have built up significant stakes in Man U: Irish businessmen J.P. MacManus and John Magnier currently own 8.65 percent of the club; Scottish financier Harry Dobson has a 6.5 percent stake; and Lansdowne Partners, a London-based investment company, owns 5.3 percent. BSkyB owns 10 percent but has been forbidden from attempting a takeover by the U.K.'s Competition Commission. Kenyon recently spoke to Institutional Investor Staff Writer David Lanchner about the challenges facing Man U.
Institutional Investor: Was the special dividend an attempt to entice investors to Manchester United stock?
Kenyon: Yes, in part. There is clearly a sense in this industry that the money that comes into clubs immediately goes out to the players. I would like to think that we are different from the rest of the industry. I took a look at our profit profile, especially how much we were getting from player trades. That’s a regular part of the business, but it varies from year to year. We decided that turning the profits from this into an exceptional dividend was a good way to prove our commitment to our shareholders.
Why not make the payout part of the normal dividend?
What we did not want to do was increase the dividend and then cut it. As far as big profits from player trading are concerned, you’re not going to get them every year. When we do make healthy profits in this market, that money will go to investors. We will do it every year that we can.
The stock hasn’t really budged despite the special dividend.
The reality is that this year we had nine of our first-team squad who were up for contract renegotiation. [Having salaries] go from 39 percent to 48 percent of turnover was a planned increase with which we are very comfortable. Going forward, investors are rightly asking whether we can grow profitability and control our costs. The answer is, We can, even if we are obliged to compete in a global market for football talent. Media contracts are the main way football clubs are funded, and they are coming down across Europe. That’s clear evidence that there will be a slowdown in wage growth. We have one of the lowest levels of wages to turnover in the industry, and it will not be pushed any higher than it is today.
Can investors expect a bigger effort on player development to lower costs?
I don’t think we are going to see seven players coming through at once as we did from the 1991 youth team. That was clearly exceptional. However, there’s always been a bigger emphasis here on developing players than at most of our competitors, and we’ve got a good crop of three or four coming through in the next couple of years. We paid a lot to Rio Ferdinand and Juan Veron [two stars brought in from other teams who haven’t contributed as much as hoped], but we have not destroyed value. These are top players in their 20s who could potentially be with us for ten years. They are partnered with homegrown talent, so these are reasonable costs when it comes to filling out a top-level, profit-generating team.
It looks like the Premier League’s contract with BSkyB represents a peak when it comes to domestic media revenues. Are there global opportunities?
We are clearly expecting growing revenues from the sales of international media rights, and that can help make up for slower growth at home. In 1989 Premier League matches were shown in 27 countries, while today they can be watched in almost 200. It clearly is a market with huge potential. Moreover, even if advertising revenues are suffering, the key issue for domestic media rights is that football is still delivering critically big audiences for BSkyB, which is still very much in the black. We are talking about a healthy product in a relatively healthy environment. So it is not all doom and gloom.
How likely is it that Manchester United could be taken over?
I don’t think that is on anyone’s agenda at present. We have a London-based investment group and an Irish consortium that have been the center of lots of speculation, but they’ve always said publicly that they regard their stakes as a financial investment. They’ve never made any inquiries or demands that would lead us to believe anything else.
Apart from international media rights, how do you intend to better exploit the Manchester United global brand?
I think the most important developments will come from our sponsorship and merchandising deals with Vodafone Group and Nike and from the global rollout of broadband Internet access. Vodafone is in 28 markets worldwide, and as third-generation mobile telephony comes through, they will show our matches throughout the world. That should do wonders for promoting the brand. Broadband should give us a similar boost, since it will allow us to directly sell subscriptions worldwide. We are not making any predictions about future profits from our new Nike deal. But they built their merchandising agreement with Michael Jordan into a business with revenues of $500 million a year. I think the brand franchise of Manchester United is worth as much as Michael Jordan’s and, given our global reach, even more.
