So what happened to all the Manchester United IPO chatter? Last we heard the Glazers were in the middle of trying to price a deal in Singapore to sell between 25-33% of the club into the market.
The market indigestion of last fall, caused by the unpalatable downgrade of the United States’ credit rating and exacerbated by Europe’s continuing refusal to eat its peas, dropped these plans straight into the tank. Since then equity and credit markets have largely recovered their losses and are off to their best start to a year since 1994. I updated the graphic from last time to show market performance and some key events which have occurred since:
As it is likely that the Red Devil IPO-talk will start cooking again I thought it might be valuable to review the background and details of the transaction.
Where/When are the Glazers selling?
The club was approved to sell shares on the Singapore Exchange last September and the Glazers are likely looking to sell as soon as markets will allow them to get a high price.
Why are they selling?
The stated plan for the sale was to improve the capital position of Manchester United by retiring the outstanding bond debt and replacing it with equity. The approximately £500m in pound and dollar denominated bonds were issued in 2010 as a way of rolling existing bank debt incurred from the Glazer’s leveraged buyout in 2005. Replacing debt with equity reduces the cost of financing the club as, ideally, any dividend payments on shares will be considerably less than the interest required to service debt. Lowering the club’s costs are key to maintaining the financial flexibility needed to stay competitive while still complying with UEFA’s Financial Fair Play Regulations.
The Glazers are likely to view debt retirement as an even higher priority now given United’s hugely disappointing season. European revenues will be down compared to last year as Sir Alex’s squad crashed out of the Champions League group stages and failed to progress over Atletico Bilbao in the Europa League. There is no relief on the domestic stage either as the Red Devils are out of both the FA and Carling Cups. The league title is still up for grabs but, for the Champions, winning only means standing still financially.
What are they selling?
Initially it was thought that the offering was all common shares (ordinary shares in the UK), later this was modified into a ‘package’ deal where investors would buy a unit consisting of 2 preferred and 1 common share. Preferred shares are higher in the capital structure compared to common shares, this confers key rights of priority of dividends and treatment in bankruptcy compared to common stock. However, preferred shares do not have voting rights whereas common shares do. So why the preferred-common structure? The ‘package’ deal is attractive to the Glazers for two main reasons. Control and valuation.
Preferred shares are non-voting and so have no say in the normal operation of the club. By keeping the ‘package’ to a large proportion of non-voting equity (a minimum of 12% is required by the Singapore Exchange) the Glazers are able to raise the needed funds while relinquishing as little voting control as possible. The package also ensures that there are buyers for the common stock. Investors who are attracted by the yield of dividends must participate in the common shares in order to get access to the preferred shares. This ensures a higher stock price (and value of the Glazers’ stake) at least for a while.
How much are they selling?
The Glazer’s were targeting a raise of £600m ($954m at current GBP/USD rates) in equity through a sale of a 33% stake in the club, a price that would have valued the club at a market capitalization of £1.8bn ($2.86bn) .
Later the equity offered shrank from 33% to 25% with the deal amended to the preferred-common structure from a straight sale of common sharse. The target of a £600m raise still stood. Assuming the common shares were valued in line with the preferred-common ratio (2-1) this attributes £200m to the voting equity. Total market capitalization would be £800m ($1.27bn), down considerably from the £1.8bn suggested by initial reports.
*Note: GBP/USD has fallen by about 4% since the IPO was first announced back in August/September, so USD values are lower than last year.