From the moment Facebook announced that its IPO would raise $16 billion it was an obvious short candidate. Since its floatation on the Nasdaq on 18 May the company’s shares have fallen by 42.8%. Yesterday’s news that Manchester United has filed to go public in a deal worth up to $3.3 billion begs the question: Is Manchester United the next Facebook?
Facebook’s disastrous IPO
Facebook was an obvious short candidate from the moment the company announced that its IPO (initial public offering) would raise $16 billion. This made it the largest tech IPO in history and the first American company to debut with a value of more than $100 billion. Facebook was to be the third largest IPO in US history, beaten only by Visa in March 2008 and General Motors in November 2010.
When it opened for trading on Friday 18 May 2012, Facebook was seriously overvalued and just about everybody knew it. Within just 3 days of trading the company’s shares had fallen from their IPO price of $38 to as low as $30.94, a fall of 18.5%. Two weeks later the price had fallen to $25.52, and today the social network trades at just $21.71.
Is Manchester United the next Facebook?
According to its filing with the SEC (Securities & Exchange Commission), Manchester United plans to float on the New York Stock Exchange, and will offer 16.67 million shares at between $16 and $20 each. If the proposed maximum price is achieved, it would value the Old Trafford club at $3.3 billion.
There are however, a number of reasons to suspect that the Manchester United IPO might go the same way as Facebook’s.
- This is not the first time the clubs owners, the Glazer family, have attempted to float the club. Plans to list in Hong Kong and Singapore had to be abandoned due to a lack of demand.
- The family has chosen to organise the offering such that the club and the Glazers each sell half the IPO class A and B shares. After the IPO public investors will own 42% of the class A shares, but will have just 1.3% of the voting rights. Meanwhile the Glazers will not only own the remaining class A shares but also the class B shares which carry ten times the votes.
- The club will officially be owned in the Cayman Islands, which means that there does not have to be a majority of independent directors on the board, while according to the Financial times, “being classed as an ‘emerging growth company’ means reduced financial disclosure for as long as five years.”
- The club is also in a not inconsiderable amount of debt. Last reported as £423.3 million. As the FT reports, “this legacy of the financing for the Glazers’ takeover in 2005 both explains the urgent need to raise cash and contributes to the IPO’s lack of appeal.” The preliminary prospectus also draws attention to this issue, saying, “We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay our indebtedness or to fund our other liquidity needs. We may need to refinance all or a portion of our indebtedness on or before maturity.”
- Manchester United’s patchy on-pitch performance, with its failure to reach the later stages of the Champions League, has also impacted its off-pitch performance. Revenue for the fiscal year 2012 is expected to be around £315 million to £320 million, down 3 to 5% from the previous year, and a one-off tax credit is the only reason the club showed a profit. Operating expenses also increased 4 to 5% as a result of a rise in player and staff compensation.
- There are also no plans to return any profits to the shareholders in the form of a dividend.
At $3.3 billion the club looks considerably overvalued and I am not the only one who thinks so. Josef Schuster, who manages about $2.5 billion at investment firm Ipox Schuster in Chicago, said, “The valuation looks very overextended… It is hard to see that the shares have a lot of potential if the shares are priced at the top of the range.”
Not surprisingly Morgan Stanley, who was the lead underwriter in the Facebook IPO, bowed out of bringing the Manchester United deal to market.
The bottom line
If it goes ahead, and it remains a big if, then the Manchester United IPO would likely represent an excellent short candidate and it will be one that we will be keeping an eye on.