Manchester United PLC's (MANU, Financial) stock spiked about 10% on Wednesday after the news broke that a Qatari investment group could be acquiring the sports team.
Takeover talks have been going on for months after the club's current majority owners, the Glazers, finally decided to sell their stake in the Premier League team due to pressure from key stakeholders, including its fans. However, multiple media outlets in the United Kingdom claim that an acquisition could be finalized soon, which has galvanized investors, leading to a surge in the stock price.
Will Manchester United's stock continue to rise? Let us find out.
Why a takeover bid is a tailwind to Manchester United's stock
As a rule of thumb, the target company in a takeover deal is assumed to sell for a premium. In fact, McKinsey & Company says private equity acquisition premiums extended to roughly 41% during 2022, conveying the proclivity of investors to overpay for captive deals.
A closer look at Manchester United's takeover implies a premium could be in the cards.
There are a number of factors that support such an argument. For instance, a comparable transactions analysis pinpoints the premiums buyers recently paid for companies such as Chelsea Football Club, Newcastle United and Bournemouth. On top of that, an opportunity to acquire a brand such as Manchester United rarely arises, luring an abundance of bidders.
A final factor to consider is the nature of the transaction. According to several sources, the proposed buyer is willing to inject an abundance of cash into the soccer club and upgrade the stadium. Thus, the stock market could determine the deal accretive based on the succeeding value additivity and the acquisition's capital structure.
Potential operational improvements
A lack of active interest from Manchester United's current owners has led to questionable club management. Investors and fans alike have made their voices heard about the lackluster operating performance over the past decade.
Manchester United's on-field performance has slipped since its long-time manager, Sir Alex Ferguson, left the team in 2013. Moreover, Manchester United is running on a net loss, and according to many, the club requires a significant infrastructure update.
As mentioned previously, Manchester United's new ownership might spend the necessary capital to get it back on track.
A peer analysis of clubs such as Chelsea Football Club, Manchester City, Newcastle and Paris Saint Germain implies that modern-day soccer team owners contribute significant paid-in capital shortly after taking ownership without attributing concern to their own financial benefit. Therefore, logic tells us Manchester United could enter a similar trajectory, consequently improving its on-field results while regaining its once unparalleled commercial status.
Manchester United's shareholders could benefit dearly if aggressive spending enters the fray. Of course, the stock would traverse into the growth stock segment, with near-term profits astray. However, long-term value creation will likely result in shareholder satisfaction.
Valuation and dividends
As of the end of June 2022, Manchester United hosted a debt-to-cash ratio of 5.29, attaching significant risks to its stock. Sure, the takeover could add to its liabilities; however, its net debt is expected to adjust lower if the assumed "cash-rich" Qatari investment group commits capital, simultaneously raising the possibility of future shareholder value.
Manchester United's current stock valuation is disappointing, with the asset trading at 5.67 times its sales and 33.14 times its book value. In addition, it does not have a price-earnings ratio as the company is currently unprofitable. However, the metric's reciprocal, otherwise known as the earnings yield, is in negative territory, suggesting the security is poorly valued from a bottom-line vantage point.
Lastly, Manchester United's dividend lends an exciting debate. Shareholders are unhappy that the Glazers set a dividend policy in motion as the company is operating at a loss. In fact, many of its key shareholders believe the Glazers declared dividends to remunerate themselves.
A change in ownership could mean that Manchester United will do away with its dividend, which is currently yielding 0.34%. Nevertheless, a dividend retrenchment is not necessarily disadvantageous to the company or its shareholders as reinvestment into the company is certainly required at this stage.
A delisting must be considered
While this discussion was written assuming Manchester United will continue trading as a public entity, a possibility remains the stock could be delisted from public exchanges if the acquirer decides to purchase it outright.
A potential delisting attaches risk to the asset and backs out any post-transaction effects on the company's stock. As such, investors must keep in mind that an ongoing debate about ownership structure might attach unwanted uncertainty to Manchester United's stock.
Concluding thoughts
Reports suggest the Glazers are ready to sell their majority share in Manchester United, with a Qatari investment group being the most likely acquirer. Although a delisting is possible, the stock's recent behavior suggests most investors believe a significant cash injection coupled with a takeover premium will attach long-term value to the English soccer team's stock.
