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Manchester United IPO: History Says Don't Buy

Forbes

If you are planning to buy Manchester United stock, you may want to think again. Publicly traded professional sports teams rarely outperform the market, and they don't even pay a dividend or grant shareholders any level of control over company decisions. Shares in Manchester United might be a nice piece of merchandise for lifelong fans of the Red Devils, but history suggests that there is little reason to believe that it is actually a good investment.

Manchester United begins trading on the New York Stock Exchange today, selling 16.6 million Class A shares at $14 per share, below the initially reported range of $16 to $20. The team will raise about $233 million before fees, well under the $333 million the team initially hoped for. Manchester United is the first professional sports team to offer shares on an American market since the Cleveland Indians in 1998.

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Most analysts have argued against buying the stock. The Class A shares offered to the public carry one-tenth of the voting power of the Class B shares held by team ownership. That means the Glazer family, which will personally keep one-half of the capital raised, will retain complete control of the team and won't be beholden to shareholders. And that doesn't even begin to touch on the fact that many analysts believe the stock is overpriced.

History also offers a guide to why investing in sports teams is probably not a smart use of capital. Manchester United itself was publicly traded as recently as 2005, and three American professional sports teams have also been traded on American markets in the past: the Boston Celtics, Cleveland Indians and Florida Panthers. An overview of their stock performances - with the Celtics excluded because of lack of data - shows that sports teams generally under-perform the market, and even large upticks in share price before the teams go private again are rarely enough to overcome past poor performance.

Manchester United made its original IPO in June of 1991, seeking to raise £10 million - roughly $16.5 million at the time, which would be worth $27.8 million today - to finance stadium improvements. The float of 1.2 million shares on the London Stock Exchange was a disappointment, however, because more than half of the available shares went unsold. Manchester United's share price was under £2, down from an IPO price of about £8.33, by the late 1980s.

But Manchester United's stock price began to climb when talk of a team sale to media tycoon Rupert Murdoch became public in 1998. Investors looking to cash in on the ownership transition began buying, and shares of Manchester United surged from £1.59 to £2.14 in a single day when the club announced that it would accept Murdoch's offer of £625 million. Unfortunately for shareholders hoping for a big payout, Murdoch's offer was later blocked by the United Kingdom's Competition Commission, and share prices dropped off.

By 2004, the value of Manchester United stock was rising once again. The reason? American businessman Malcolm Glazer, who also owns the NFL's Tampa Bay Buccaneers, began buying out shareholders, and it quickly became apparent that he sought to make a takeover bid. Speculation of his takeover pushed share prices up in early 2004, and they continued to rise as Glazer increased his ownership stake. In May of 2005, he picked up a 28.7% stake in the team from Irishmen JP McManus and John Magnier, pushing his total ownership above 70%. Manchester United's share price rose 13% to £2.99 when news of the deal broke.

Glazer was soon able to delist the team from the London Stock Exchange, and just a month later had taken control of 98% of the team's shares. His offer to the remaining shareholders was £3 per share, a great deal if you bought in when share prices were surging from speculation of Murdoch's takeover. In fact, if you bought at £2.14 after Murdoch's offer was initially accepted, and you held on until Glazer completed his takeover, you would have gotten a 40% return. London's FTSE 100 index fell about 15% in that same time period from 1996 to 2005, so it would have been a great investment. But if you were sticking around since the 1991 IPO, your shares would have declined in value by nearly 64%.

Today's IPO, unlike Man U's previous one, is on an American market, and there are a few precedents for publicly traded sports teams in the United States. The Cleveland Indians, for instance, went public in June of 1998, the only Major League Baseball club ever to do so. Team ownership offered four million Class A common shares on Nasdaq, priced at $15 per share and raising $60 million before fees. Like with the soccer club across the pond, the team's stock didn't take off initially. The share price was down to $14.75 after its first day of trading, and it continued to sink into the single digits throughout the following months.

But like with Manchester United in 1998 and again in 2004, talks of the team being sold quickly drove the stock price up. The team's sale to current owner Larry Dolan was announced in November of 1999, driving the share price up to $20.63, and shareholders were paid about $22.61 per share when the team went private in February of 2000. Had you purchased at the IPO price of $15, you would have made $7.61 per share, more than 50% of the initial cost. In that time period, however, the Nasdaq Composite index grew by 123%, dwarfing the late surge of the Indians' stock value and showing once more why publicly traded sports teams are not worth the trouble.

One final example is the Florida Panthers, another sports team previously traded on American markets. The Panthers issued an IPO on Nasdaq for $10 per share in November of 1996, though the stock was relisted on the New York Stock Exchange the following July. Panthers' stock actually surged from its $10 IPO to a high of $32.50 in January of 1997, but the rise in value is mostly attributable to team owner Wayne Huizenga purchasing two resorts, the Hyatt Regency Pier 66 and Radisson Bahia Mar, under the Florida Panthers Holdings company umbrella.

But the non-sports businesses did little to sustain the high share prices. The share price slid to below $26 in February and, as of July 1998, the stock had dipped to a little over $17. In late 1999, the company distanced itself from the hockey team and its name was changed from Florida Panthers Holdings to Boca Resorts. It didn't do much to help, and in November of 1999 the share price was down to just over $9.

Huizenga finally sold the team in 2001 to a consortium led by pharmaceutical businessman Alan Cohen, and the chart on page six of this valuation report of Huizenga's Boca Resorts shows that stock price rebounded to around $15 when the team was sold. Similar to the Indians' stock, Panthers shares bought at IPO would have gained about 50% in value if you held on until the team was sold. But again like the Indians, that growth did not keep up with the American markets, which grew by around 57% in the same time period.

The lesson to be learned is that sports teams are not reliable investments. Team owners often issue public offerings in order to monetize their holdings without losing team control, and shareholders don't receive the benefit of dividends, game tickets or merchandise. On-field performance doesn't matter much, either: the Indians' stock suffered despite the team winning the American League Central for five straight seasons from 1995 to 1999, reaching the American League Championship Series three times and the World Series twice, and Manchester United's disappointing IPO in 1991 came in the midst of a spectacular resurgence in on-field success, as the Red Devils won consecutive league titles in 1991 and 1992.

Manchester United may be your favorite team, and you may even think that they will dominate on the pitch in the coming years. It doesn't matter. If history teaches us anything about publicly traded sports teams, it's that they underperform the markets, and even late surges in share prices can do little to overcome longtime losses. So feel free to buy in if you want a certificate to hang on the wall, just don't expect that it will be worth much anytime soon.

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