Manchester United IPO: Should you buy shares?
(MoneyWatch) When Manchester United sells $300 million in stock to the public for the first time today, investors will have the ability to get in on the worst initial public offering since Facebook. The British professional football club (they play the sport we call soccer) is going public at a price of $14 a share on the New York Stock Exchange under the ticker MANU.
Like Facebook (FB), which had such a common-man appeal that no number of warnings could possibly wave investors away from that train-wreck-about-to-happen (but don't say we didn't try), investors are nearly certain to snap up shares in the English football team in the feeding frenzy that characterizes the IPO aftermarket.
Underwriters have already sold the shares that will go at the offering price, so the common investor -- that means you -- will likely pay more.
Here's the short and simple version of why:
The terms stink: Normally when you buy shares in a public company, you become an owner able to vote your shares in your own interest. In this case, even though individual investors will pour some $380 million into buying 19 million MANU shares and could hold the majority of the common stock, they will have absolutely no say in how the company is run. Your vote means nothing. The selling shareholders, the Glazer family (who will be pocketing some of your cash) retain 99 percent of the voting control. In legal filings, they say that they will always have a super-majority vote, disenfranchising the chumps who buy MANU shares into perpetuity.
The price is insane: Normally, a company's stock price is a bargain when it's selling for a price-to-earnings ratio that's at or near its growth rate. (The p/e is the company's share price divided by its earnings per share, so a company that sells for $30 a share and has earnings of $3 would have a p/e of 10 -- 30 divided by 3.) Thus, a company that's growing at a 20 percent clip might be a good buy when it is selling for 20 times earnings -- a 20 p/e.
Where does Manchester United fit on that scale? Research shop Morningstar estimates that at an $18 price (the initial price for the IPO had been estimated to be $16 to $20 a share), MANU would be selling for 110 times projected 2013 earnings. Does it have the growth to sustain that sort of lofty valuation? No. Manchester United's revenue is growing by about 11 percent per year. Its net profit growth is impossible to calculate because the company went from a loss to a profit last year. However, if you use the company's pro-forma figures for so-called EBITDA -- which is income minus taxes, depreciation, and interest -- the company's profits have actually declined every year since 2009. They're up slightly -- 2.5 percent -- over the first nine months of the company's fiscal year ended March 31. But that's hardly a growth rate worthy of a 110 times valuation.
Risks: Even this tepid growth rate is incumbent on the team remaining popular and expanding its brand name. If the team registers a losing season or loses key players, it can lose broadcast, ticket, and sponsorship revenue. In addition, the team's league has a great deal of control over financial arrangements. In a pinch, the soccer club's economic needs can and would be put ahead of the needs of shareholders.
IPO prices can fall even in the best of circumstances: For 45 days after an initial public offering, all of a company's key financial players -- from underwriters to managers -- are barred from talking about a newly issued company's stock. This regulatory "quiet period" puts the shares of most IPOs under pressure and often causes the share price to fall. That's not worrisome if the company has a great business model. It just gives you a better time to buy than the feeding frenzy on the offering day.
But if the company's financials are weak -- as they were with Facebook and as they're likely to be with Manchester United -- this quiet period gives investors a chance to take a second look at the company's numbers and think: "What have I done?" That "OMG" moment often starts a slide in the stock price as investors bail out. And that's hard to stop.
In Facebook's case, for instance, the shares that went public at $38 and sold for as much as $45 on the first day are now selling for less than $21 -- a 53 percent loss in a matter of months.
It's worth noting that when we tried to wave investors away from Facebook, we brought up the same issues about the stock price being overvalued and the fact that management has complete voting control, so there's no way to make investor dissatisfaction heard without suing. And yet the hype continued right up until the (delayed) opening bell.
So it's possible that you may find the notion of buying into one of the world's premier sports teams so enticing that you'll ignore all the financial data that says you shouldn't. But don't say we didn't warn you.
