Manchester United: Summer wave maker, and an investment opportunity too?
If there has been one team that made waves in the world of soccer this summer, that was probably Manchester United. First came the uncertainty over the future of their star player, Cristiano Ronaldo. This was followed by a run of poor sporting results, including a four goals to nil away defeat to lowly Brentford. And finally, the million-dollar outlays to sign Casemiro and Antony, followed by a winning streak that seems to have turned their sporting situation around.
But, as investors, what has most caught our attention over the summer period has been the succession of names that have emerged as potential buyers of the Old Trafford team, which is currently owned by the Glatzer family. The time in Manchester of these American businessmen has usually been accompanied by controversy and criticism of their management. Such controversy and criticism sharpened this summer, increasing rumors about a possible sale.
The first to make headlines as potentially interested in taking control of the club was precisely Elon Musk, through a message on his Twitter profile, although he soon explained that it was just a joke. From that moment on, other names began to emerge, such as Sir Jim Ratcliffe, owner of one of the largest fortunes in the United Kingdom, or the American venture capital fund Apollo, among others.
In recent years, we have been particularly optimistic about our investment in the sports sector and, in particular, also in publicly traded soccer clubs. As of this date, our Behavioral Economics-based fund holds positions in German Borussia Dortmund, Dutch Ajax Amsterdam and French Olympique Lyonnais. So, obviously, the emergence of potential buyers for the English club leads us to rethink whether this could be a good investment opportunity.
We should remember that the Premier League rival Chelsea has just been acquired for more than four billion pounds, while the Manchester club's share price puts its market price at only half that figure. What price might a buyer be willing to pay for United, which has a more global brand and higher revenues than the London club? Does this make it a good investment opportunity for us?
This internal thought process, which recurs whenever situations of this type arise, helps us in reviewing and further strengthening our investment principles. These principles end up taking the form of a series of non-negotiable qualities that we always look for in the companies we add to our portfolio.
The first of these qualities is that the company must operate a good business. In this respect, Manchester United would more than meet this requirement. As we have already mentioned, European soccer is a sector that we view very favorably due to the changes taking place at the financial and management level, the long-term growth trends and the undervaluation that exists in our opinion.
The second characteristic we look for is that companies should have a solid balance sheet. Many of the companies in which we invest have little debt or even net cash. As long-term investors, companies’ stability and survival is key for us. Debt in excess of what is reasonable stifles companies and is a poor traveling companion. Manchester United's current net debt stands at approximately 500 million pounds. This figure has increased over the last year and is high in relation to the club’s current level of recurring cash generation.
Third, but perhaps most importantly, we seek out companies with management teams of ethical integrity and a track record of proper capital allocation. This is precisely what most distances us from a possible investment in clubs such as United or Juventus, which have allocated a large amount of resources to investments that, in our opinion, have not contributed to increasing shareholder value. As with all businesses, it doesn't matter how cheap it may seem if you end up exposed to the possibility of the business endlessly burning through cash.
In short, it is quite likely that different potential buyers will approach Manchester United and one of them might ultimately close the deal. If so, the price paid is likely to be much higher than the current share price and current investors could earn a very high return. But this is speculation about the future. And, although it may be very successful in the short term, we don't invest that way. Simply put, we believe in a different process.
Fundamentally, because there is a risk that in the end the club will not be sold and the current managers will continue with an inefficient capital allocation policy. If so, no matter how cheap the current price may seem, it is difficult to predict how much value might be destroyed. As against the opportunity to make a lot of money quickly if there is a change of ownership, we prefer to wait, even at the risk of ending up paying a higher price, and invest with greater visibility once the company meets the aforementioned qualities.
To do otherwise could lead us to fall into the very risk we work hardest to avoid: that of a permanent loss of capital for our investors. Remember Warren Buffet when he said that, when investing, “rule number one is never lose money and rule number two is never forget rule number one.”