Manchester United

Moat: 2/5

Understandability: 2/5

Balance Sheet Health: 2/5

Manchester United is a globally recognized football club, with a rich history and strong brand, but with a complex business model that has recently seen several financial difficulties and a lack of consistent performance on and off the field.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Manchester United is one of the most iconic football clubs in the world, boasting a massive global fan base and a rich history. However, their business operations and financials are complex, especially with the multiple revenue streams.

The club’s business model revolves around three main sources of income:

Commercial Revenue: This includes sponsorships, advertising, merchandising, and the sales of branded products.
Broadcasting Revenue: Income derived from the sale of broadcasting rights to TV and media outlets around the world.
Matchday Revenue: This encompasses income from ticket sales, hospitality services, and other match-related activities at Old Trafford.

The football industry is a global one, and Manchester United is a globally operating business, with fans and revenue sources across the world. Europe and England are major regions that contribute to its earnings.

The club also has many commercial sponsors. Sponsorship revenue is closely tied to the brand recognition and popularity of the team. These contracts often have very high values and help generate substantial revenue. This is a key area where the business should be stable and profitable.

Industry Trends and Competitive Landscape

The football industry is both lucrative and cutthroat, with fierce competition for success.

The rise of broadcasting rights has increased revenue for major clubs, while globalization and digital media have expanded the fan base. * This industry has high market share concentration in particular leagues. For instance, the major clubs in English Premier League share a substantial proportion of the broadcasting revenue.
Football clubs are facing increasing financial risks and scrutiny due to high player acquisition costs and high transfer fees. However, there’s a great deal of pressure to maintain a good position.
The sports market is constantly evolving, with a lot of new challenges. This requires a lot of vigilance and innovative ways to maintain and grow profitability.

While many clubs enjoy consistent domestic dominance and strong revenues, they still face some challenges from the volatility of European and the global economy. There are some risks involved with the global fanbase not converting to paid revenue.

The key competitors in this industry are the most recognizable football clubs in the world and local clubs that have a good following and management.
- In Premier League, the key competitors are Manchester City, Arsenal, Liverpool, Tottenham, Chelsea, and other teams.

 * They are competing in many ways, both on and off the field, for popularity, talent, sponsorships, and revenue.
 * Any club that gets a competitive advantage can take a lot of power from another, making this a difficult and dynamic sector to invest in. 

What Makes Manchester United Different?

Brand Power: Manchester United has one of the most valuable and recognizable brands in sports, with a global following.
Fan Base: It has a massive global fan base of billions, which directly contributes to its revenue. * The core of the fan base is in the United Kingdom, which means the club faces a risk of the local popularity declining.
Historical Success: Its history of success is very long. The club has many titles, trophies, and achievements in its bag. This creates loyalty among fans and sponsors.

Financial Analysis

Manchester United’s financials have been a mixed bag, especially in the last few years.

Revenue: The club’s revenue has recently been affected by a combination of on-field performance and the overall economic downturn. Some revenue streams, especially sponsorship, have remained mostly stable due to the strength of their brand.
- The club’s revenue for the year ended 30 June 2023 was £648.4 million, which is an increase of 16.9% compared to £583.2 million for the same year in 2022. A substantial portion of the revenue comes from commercial (£302.9 Million) and broadcasting revenue (£259.1 Million) which represent 87% of total revenue. In particular, commercial revenue increased by 28.5% due to strong commercial business as a result of COVID restrictions being mostly removed. Matchday revenue also saw growth of 13.8% driven by strong matchday attendance and ticket sales. * There is a lot of variability in performance, which shows a real need for careful management, or the club risks missing its financial goals.
  - A few more major revenue drivers include sponsorship of apparel brands like Adidas, broadcasting deals with NBC and others, and also other sponsorships like Kohler and Tezos.
Profitability: The club has had periods of strong profit, but overall profitability has been shaky in recent years, reflecting increased operating expenses and decreased matchday revenue.
- For the year ending June 2023, the operating profit was at £10.2 Million. However, overall profit for the year is down because of a net loss of £28.7 Million, driven by losses from financing activities. Despite revenues being increased, increased staff wages, player contracts, and other costs have led to decreased profits.
Net debt levels are also high for the club. In particular, the net debt reached £509.8 million in 2023 which shows that there is a significant level of debt on the club’s balance sheet. The company has high interest expense and limited capital available for investment and growth.
Liquidity: The club has considerable short-term debt, in the form of borrowings, and short-term contracts. All of this implies they need better and more stable cash flow to meet their obligations.
- The club needs to ensure they can service the debt over the short term.
The need for liquidity becomes much more apparent when you analyze the balance sheet, seeing the high levels of debt and high levels of short-term payables.
Moreover, these financial obligations are going to hamper the long-term strategic goals of the company.

Moat Analysis

Brand Recognition: Manchester United’s brand recognition is incredibly strong. It is a recognizable brand across all corners of the world, and it inspires a great deal of loyalty among fans and sponsors alike. However, there is no guarantee of it lasting perpetually, or being a source of long-term investment returns.
Global Fan Base: Their global fan base is an asset, which allows them a strong potential source of revenue in new and existing markets.
Broadcasting Deals: Because of the popularity of the club, they have some of the biggest broadcasting deals in football, creating a reliable and long-lasting revenue source. However, the long-term agreements often mean that they can miss opportunities that are present in a quickly-evolving digital ecosystem.
Historical Record and Trophies: The record of on-field successes, both national and international, attracts fans and boosts the club’s brand power.
Competitive Advantage Most football clubs, similar to many other professional sports organizations, rely on their history and legacy to maintain fan loyalty. All clubs do not achieve their goals consistently, making this a highly volatile sector.

Based on the above analysis, here is the moat rating:

Moat Rating: 2 / 5
Manchester United has a very famous and valuable brand and is a highly recognizable entity. * However, the economic moat is not as strong as expected given the problems with business operation and inconsistent performance. * A moat is given based on profitability, consistency, and the business operations. While they have brand and a good global reach, they do not consistently produce profit or high ROIIC. * The business has faced many internal and external issues, such as financial constraints, lack of long term strategy, and inconsistent on-field performance. This can severely hamper their competitive edge, meaning they have a narrow moat. * Risks to the Moat and Business Resilience

The moat faces numerous risks that need to be noted: * On-field Performance: Declining on-field performance may cause lower fan engagement, decreased revenue, and the loss of sponsors. * High Costs: The costs of player acquisitions, salaries, and other related expenses in the club’s finances can impact its overall profitability.

Management Effectiveness: Poor management decisions can lead to a negative perception of the brand, making their brand less powerful.
Changing Trends: New trends in the entertainment and broadcasting sector can make their current contracts and agreements with streaming services obsolete. * The market also changes in terms of sponsorship. If one of their major sponsors has problems, they may lose a key part of their overall revenue.

Despite these risks, there is the potential for greater success:

Strong Brand Power: The club’s brand recognition provides resilience. Even during periods of poor performance, they can still maintain a substantial fanbase which would keep revenue coming in.
Global Fanbase: The global fan base makes their revenue streams very diverse and offers a level of protection against a local downturn.
History and Tradition: The club has more than a century of history which keeps fans connected, and makes them more interested in the team.

Understandability Rating

Understandability: 2 / 5

While understanding the overall concept of a football club business is relatively simple, the intricacies of Manchester United’s specific operations are very complex:

Multiple Revenue Streams: The complexity arises from understanding all the interconnected revenue streams and how the performance of the club influences all of these. * There are many different streams of income, and they must all function well for the business to be consistently profitable. Any weakness in any of the segments can hamper results.
Financial Details: The financial aspects of the club, particularly those related to debt, player contracts, and amortization, add layers of complexity to the business. * It can take a long time to understand each of the different elements and how they can change over a period of time.
Influence of External Factors: Their success is greatly impacted by external factors, such as the success in the Premier League, UEFA Champions League, sponsorship deals, and broadcasting deals. The performance of all these external factors has a considerable influence on the business performance.

Balance Sheet Health Rating

Balance Sheet Health: 2/5

Manchester United’s balance sheet faces several challenges that reduce its rating: * High Debt: The club has an enormous level of debt that has been accumulating for many years, and they will have to work hard to reduce it in the coming years. * Intangible Assets: They have a ton of player assets and contracts that will likely depreciate over a period of time and become a liability.

Reliance on Borrowings: There is a reliance on short-term borrowings that must be addressed. It is not a sustainable source of cash.

These factors indicate that the balance sheet is not healthy enough. While a valuable company, the high debt and reliance on external debt to keep operations running can have serious consequences if those revenues and agreements fail to deliver.

Recent Issues, Controversies, and Management Views

Off-Field Performance and Stability: The company has faced recent issues with its performance in the football league, and lack of managerial stability. There is a lot of change in the squad, the coach, and management, which has lead to an element of instability in the management.
- It can be said the most important element for a business like Manchester United is stability and consistent management.
Glazer Ownership: The club’s ownership under the Glazer family has faced a lot of fan opposition, resulting in a lot of public protests. While the company has not always acknowledged the issue, there is a potential brand impact here that has to be taken into account.
- With this ownership, the business has had a history of poor financial decision-making, and lack of focus on long-term success.
Recent Economic Slowdown The recent financial crises across the world are likely to impact the company’s revenue from broadcasting and fan spending. This means the club will need to figure out new ways to diversify, or risks missing its long-term goals.
- The most recent results show that they are taking a major hit from a negative macro economy, which is a substantial problem for such a company to get revenue and profits from various segments.

The management has focused on improving on-field performance, building a competitive squad, and finding new strategic opportunities. They want the club to make more revenue through commercial deals, broadcasting opportunities, and matchday revenue, but the current economic environment is a huge problem in that direction, making future growth difficult.

They have given an assessment that they are not focusing on short-term performance, but on long-term strategic growth. However, there needs to be more change in their business strategy in a more modern way to account for the evolving nature of the market.

They also highlighted the importance of their global fanbase, which is where they think they have a competitive advantage.

All in all, they need to work more to gain investor confidence.