I have an opportunity for you guys! Who here likes sports?
Wow. That was a lot of hands that went up. Okay, how many of you like soccer?
Not so many hands. That was to be expected though.
Manchester United recently refinanced £500 million worth of debt, going to the capital markets to do so. The issue hasn’t done so well, selling off 5% in the few weeks since they’ve been issued. (Source)
There are several reasons for the sell-off. First of all, it turns out that Manchester United isn’t really making money. They did turn a pre-tax profit of £48 million, but that was only because they sold star player Cristiano Ronaldo to Real Madrid for £80 million. This is even after making the UEFA Champions League Final and winning the English Premier League. (Source)
The team also has a lot of debt. When American Malcolm Glazer bought the team in 2005, he paid £790 million. He financed £700 million of the purchase, splitting it between a regular loan and a payment in kind loan. The payment in kind loan just accumulated the interest, rather than requiring any payments. Oh, and the interest rate was 14.25% on the payment in kind loan. Ouch.
It’s not like the new debt is saving the club money either. Estimates (before the issue) put the interest rate between 9-11%. This would put interest on the new debt at higher than the £41 million already paid. And this doesn’t even pay off the payment in kind loan.
Besides all this, the European high yield debt market is awash with new issues, most of them of better quality.
Geez. Even Manchester United is a crappy investment. The only people who make money in professional sports are the athletes and the Steinbrenners. Why would anyone want to buy a sports team?
Generally, their value does go up over time. The owner of the Houston Astros purchased the team for $117 million in 1992. Forbes currently has the team valued at $445 million. There are currently rumblings that he may be selling the team.
Not all sports team owners end up so good though. The Phoenix Coyotes very publicly went bankrupt last summer. The team had at least 3 different sets of owners in their brief history in the desert. Even though the team is having a fairly successful campaign this season, their future in Phoenix is still up in the air.
So even though many billionaires have done fairly well with their purchases of professional sports teams, I think I’ll stay away from Manchester United’s debt issue. Their balance sheet scares me just a little bit.