Those Red Devils of Atonement

Protest at Manchester United is not working. The green and gold, the sit-ins, and the demonstrations raise attention, but they are toothless in the face of the money at stake. The Glazers, as shareholders, have badly let down the Red Devils fans, but they've only done what the markets allowed them to do. We need a different approach to solving the current pattern of bad decisions, one that will satisfy the fans and the shareholders.

#atonement ∩ #manchesterunited ∩ #IanMcEwan

Once upon a time, someone said this in the Wall Street Journal about Manchester United, also known as, at least in the last 50 years or so, The Red Devils. Recommending a 'short', as a lifelong fan of Manchester United, was, and remains, some sort of heartbreak.

Memo: Shorting a stock means anticipating its price will fall, allowing the investor to profit from any decline (conversely, losing from any rise). The mechanics of this involve the investor borrowing shares of the stock from a third party who owns the stock (e.g., a broker) and then selling them at the available price. The investor buys back the shares to return them to the third party, ideally at a lower price to make a profit, but more often than not, at a higher price, realising a loss.

Should professional responsibility (it was such an obvious 'short' to anyone prepared to look past the glory days of the Alex Ferguson years) override the private? Might I have just passed by and not looked that way?

Manchester United is more deeply entwined in my memory than anything I can recall. I can still see myself perched on the pipes along the front of the Paddock watching bad football on an awful pitch, more ploughed than turfed. I lost countless hours tuning an enormous radio set to see if United had beaten some alluring-sounding team, most memorably Saint Etienne in the Cup Winners' Cup. I took a week off school to recover from that Alan Sunderland goal, stood in endless lines to get, and not get, an unallocated ticket behind the Stretford End. As an adult, my wife repeatedly issued a red card as I cursed Martin Keown on Sky in language my young son believed to be criminal. As a father, I spent year after year travelling back to Old Trafford perched on an Avanti bin from Milton Keynes.

A good friend called me a disgrace for ‘going short,’ as it's called in the trade. I’m not sure he was wrong, even though the 'short' was very right.

I don’t recall telling my father, who introduced me as a six-year-old to Manchester United, that I’d 'gone short'. Maybe I convinced myself he wouldn’t understand. Perhaps I didn’t want to say. Maybe he knew. He once lost me in the crowd as a seven-year-old. Leeds v Everton. A policeman paraded me around the pitch. Leeds, of all places. Maybe we are even now?

Who is doing the atoning in this piece is unclear.

Football is really not like other businesses

It’s not painful ‘going short’ stocks that make things one merely likes. Say $AAPL or $DNUT. Loving is not liking.

I found it painful shorting Manchester United, or rather $MANU (the ticker of the club's stock listed on the New York Stock Exchange), because football simply cannot be treated as just any old business. One shouldn't be able to 'short' institutions like this.

Football is really what people say it’s about: community, camaraderie, identity, loss, hope, memory. It's about seats that make you far too intimate with a neighbour, last night’s lager blanching the air, that bloke behind you who really could do standup if he tried. For some people, football is everything.

And, for clubs like Manchester United and Liverpool (not City, definitely not City), it’s about history (City don’t have a history, really, it’s just a pop-up shop built on a gusher). And yes, football fans snark like this all the time; it's part of the fun, at least when it stays sane. That the red Manchester United was the green and gold Newton Heath Lancashire and Yorkshire Railway Football Club until 1902 is a reminder of the club's link to the community and working people. F.C. United of Manchester, founded in 2005 to oppose the takeover of Manchester United (see below), bears the city's industrial heritage on its badge.

Munich

For United specifically, the club built its brand and identity out of the legacies of the Munich Air Disaster.

David Peace eloquently argues this case in Munichs (2024). Peace reminds us of the multiplicity of disasters on 6 February 1958, that the crash killed players, staff, crew, and numerous journalists. It traumatised most of the survivors and many of its witnesses. You can’t visit Old Trafford and not be reminded of this: the banners, that haunting clock, the plaque, the away fans who continue to celebrate the disaster. The breakaway club fan group is called The 1958.

It’s impossible not to be moved by the extent to which the bodies of the dead remain alive in every red brick of Old Trafford. This isn’t sentiment; it’s deeply shared amongst Manchester United fans. I feel it when I see my son’s passion for the club. Fandom is leasehold, not freehold. You hold it as a gift and then pass it on.

This is why 'shorting' $MANU could never be like any other ‘short’. Atonement is necessary.

Perspectives: a brief financial background

One of the more remarkable stylistic features of the opening section of the novel Atonement (2001) is how Ian McEwan interweaves a series of perspectives from a family gathered for the weekend. These are not presented in a temporally linear fashion, but they move backwards and forwards in time in order to complicate the reader’s understanding of the truth within the narrative.

We need the ability to see different perspectives here.

There are 3 principal investors in $MANU: the Glazer family, Sir ‘Jim’ Ratcliffe (via an Isle of Man registered entity called Trawlers Limited), and the stock market (essentially, various fund managers). I don’t need to go into the deep history of this situation. There are numerous good summaries. Take this one. Tortoise have also released a podcast discussing this. And The Athletic's Chris Weatherspoon frequently goes into great detail.

The history of the situation – the original owners, John Magnier and J.P. McManus, and their dealings with Alex Ferguson – makes for good journalism, but it feels irrelevant now, spilt milk. It's apportioning blame for who did what and who said what. It's unproductive.

The nub of the issue is this.

Capital structure

$MANU has 2 different classes of shares. Class A shares have 1 vote, and Class B shares have 10 votes. A and B shares carry equal rights to dividends. So, the holders of the Class B shares are effectively in control of the company's decisions via their disproportionate voting rights. The economic value of the company is shared between Class A and B shareholders, in principal at least, since the theoretical value of a company should be equal to the discounted value of all its future dividends.

Very roughly, and simplifying enormously, the B stock of $MANU splits ~70:30 between the Glazers and Ratcliffe.

Since Ratcliffe owns both A and B stock, in broadly equal proportions, he has ~30% of the economic value. The Glazers, in the main, own B shares, so their share of economic value is ~50%. The market holds the rest via A shares. Counting the beans at the current stock price has the Glazer stake worth ~$1.2bn, the club’s MV ~$2.4bn and the EV ~$3bn, a bit more when adjusted for all creditors.

MV is the market value or market capitalisation of the company, calculated as the number of A and B shares outstanding multiplied by the current stock price. It is the value of shareholder equity in the business, at least in so far as the market calculates it at any one time. EV is the value of the entire business and is (simplifying) the MV plus the value of any debt. We can then apportion the EV of a business its shareholders and the holders of its debt, usually banks.

The problems at $MANU largely stem from the fact that these 3 investors have quite different cash flow profiles, or perspectives, at this point in history.

The Glazer Perspective

The Glazers acquired their ownership of $MANU back in 2005. The precise details of this aren’t entirely clear, at least to me. However, one would assume they used a shell entity, financed it with some of their own money as equity (or their own debt), and raised further debt in the shell. The actual ratio here isn’t known I think, but assuming a 25:75 split of equity to debt, the Glazer equity may have been ~£200m. The Glazers then used the combined funds, equity and debt, to buy out the stakes of the existing $MANU shareholders, and the shell was then presumably ‘pushed down’ (via merger into the club itself). The shell's owners thereby held the equity in the club. In contrast, the club itself contained all the debt and became responsible for its servicing and repayment.

The Glazer family (directly and indirectly) sold some of this equity in an initial public offering (IPO) of $MANU over a decade ago (technically, the second $MANU IPO, the first having taken place back in 1991). They sold more in the subsequent years through a series of follow-on offerings. In total, they have realised I’d estimate ~$300m. The buyer of this equity was the market: the Glazers sold Class A shares.

The Glazers have also sold Class B shares to Ratcliffe, realising an estimated ~$1bn in 2023-24.

They have also taken a series of dividends and management/consultancy fees from the company. One way to treat these is as a deduction from the cost of their initial equity purchase of $MANU (beginning in 2003). I estimate that if we do this, then the Glazers' original purchase price is now close to a net cost of zero.1

They still own a $1.2bn stake in $MANU via their remaining B shares. It's worth twice that at the valuation paid by Ratcliffe.

In summary, one way to see this situation is as follows:

  1. Cost of purchasing $MANU net of dividends and fees: ~$0 **

  2. Cash taken out of equity holding in $MANU: ~$1.3bn.

  3. Remaining equity value: ~$1bn to ~$3bn.

** Other estimates place this at £20-75m, but it's as close to zero as is worth arguing about

I have ignored the contentious issue of the debt that the Glazers used to purchase their original holdings in $MANU (that is any debt they may have raised to supplement their equity, and the debt they raised to purchase the club). It is worth noting that the Glazers assumed significant investment risk when they set out on the LBO. Hindsight is the easiest factor in investment. Their investment was never risk free even though today it appears to be so.

I've also ignored the interest costs on that debt that the club has subsequently borne. Many reports calculate the total cost of interest paid by the club and assume this is money that the club could otherwise have used for transfers or stadium renovation. I’m not so sure it’s that simple, and here, I think it is best to ignore this. These payments don't in anycase flow to the Glazers but to the debt holders.

The Ratcliffe Perspective

Ratcliffe has bought an estimated ~$1.65bn of equity: A shares via a tender offer to existing market shareholders at $33 (which we must assume most took up given the stock price has averaged around half that for most of the last decade), and B shares at $33. Some of this money goes to the Glazers for the Bs, some to the market holders for the As, and $300mm has gone into the club for infrastructure investment.

Personally, I struggle to understand the $5-6bn valuation this transaction implies. Ratcliffe paid twice what the market thinks $MANU is worth. And he also spent almost 2x to 3x the replacement cost, depending on how you value the brand. He's also bought a minority voting position, given that the Glazers own most of the B shares. I presume there is a shareholder agreement that gives Ratcliffe some comfort. I don't know. He does have board seats. And his track record is exemplary. He deserves time given the track record, and given the depths of the problems he faces.

The Market Perspective

The stock price is, give or take, the same as it was in 2013. It’s been a horrible investment. And it’s got a little more horrible in the last few weeks since I did this chart, courtesy of Sharescope.

The stock has annualised a total return (i.e. including dividends) of roughly zero. By comparison, the S&P 500 has done almost 13% a year. This means $MANU has been about as bad as the US Treasury Bond market, which has been pretty awful.

Investors can’t even argue the journey to zero has been a peaceful ride. The stock has been as statistically volatile as Boeing, which has had serious issues, and more volatile than the Argentine or Brazilian stock indices. The dividend cushion has even dried up.

What this doesn’t account for is that the average investor has exited a quarter of their holdings at $33 when Ratcliffe tendered for the A shares. But even allowing for that, the internal rate of return on the investment (IRR) is at best no better than the rate offered by the most liquid and secure alternative on the planet, the Fed Funds.

[suspoiler title=”definition: IRR” style=“fancy”]Financial analysts use IRR, or internal rate of return, to estimate the profitability of potential investments. IRR is a discount rate that makes the net present value (NPV) of all cash flows equal to zero in a discounted cash flow analysis_ (Investopedia)[/su_spoiler]

Competing perspectives

The bottom line of all this is rather simple:

1 of these 3 investors is super happy. From their perspective, it’s been a terrific investment. Nay, it has been a staggeringly good investment. Generationally defining for one family and its ancestors.

1 of 3 is probably feeling a tad queasy at this point.

And the last 1 must just enjoy suffering: I can’t explain it any other way. Perhaps I’m unfair. I was 'short', after all, so this was the crowd I was playing against. Perhaps they believe the discount to fair value is so significant (50%+) that the market pays them for the lack of voting rights, the poor liquidity, and the volatility, and that it's a private asset with mark-to-market pricing. I don’t know. They seem to talk a lot about 'brands' and 'eyeballs'.

The fans

There is a 4th constituency to take account of here: the fans who have foregone the enormous gains that would otherwise have accrued to them and the club, but have instead, to this point at least, mostly accrued to the Glazers and the holders of the debt in $MANU.

If 1 stakeholder is 'super happy', 1 is 'a tad queasy', and 1 seems happy with zero returns, the fans as stakeholders are furious. Or rather, and here is one of the problems for this protest movement, around 10-20% of the fans are furious. Another 50-60% just seem mildly frustrated, and don't want to do anything about things. Around ~25% seem to want little more than a signed shirt and a seat on the train back to Euston.

Let's for now focus on the part of the fanbase that really is furious.

Usually, this is the point where a Manchester United fan starts attacking the Glazers. Not here, despite a shared anger. We need to face the facts. The Glazers have been shrewd and patient investors. They took advantage where others feared to tread and had the vision to buy at a price that, at the time, trumped other extremely credible bidders. They have broken no laws, no rules, no standards of conduct. At times, their treatment has been nothing short of abysmal. I sense a degree of prejudice in some of the criticism aimed at the Glazers, that ugly prejudice which stereotypes financially generated wealth. This must be disturbing for the family, and United fans should kick this out.

I don't know how much more howling at the moon Manchester United fans can sustain. I don't even see what changes at the club if the Glazers up and leave tomorrow. The debt stays. The value extracted from the business doesn't go away. Arguably, things could get worse, since a new investor would need to extract even more value from the asset and from a higher starting price. Be careful then for what you wish for.

The key question now is how to realign all these fractured stakeholder relationships into a single vision.

What's the real problem?

3 enormous forces have driven the gains enjoyed by the principal voting shareholders:

  1. The increase in Sky’s UK pay-TV subscriber base. This is not merely due to the increase in Sky Sports subscribers, but primarily due to Sky’s successful strategy of forcing subscribers to ‘buy through’ their basic package of channels to get to the football.

  2. The global development of the Premier League.

  3. Luck. That is, the good fortune that resulted from Manchester United having a crop of outstanding young players who matured pretty much simultaneously in the 1990s, and a manager with the right temperament and skill to nurture those talents. Such luck meant the club could underinvest in talent for a protracted period (especially the decade following 2005), and at a time when the competition (especially City, yes that City, and Chelsea) rapidly increased spending.

It’s hard to see what value, in the aggregate, the Glazers have added. They took the risk, indeed. And risk deserves a return. But that’s been paid. Instead, the rather remarkable feature of the Glazers' tenure at $MANU is the consistency of the club’s (bad) decision making. Here are 10 of the worst decisions:

  1. The appointment of Ed Woodward as CEO without experience of running a club at this level.

  2. The length of David Moyes’ contract, coupled with the time allowed to him.

  3. The missed signings: Aguero, Baines, Bale, Fabregas, Rice, Tevez.....

  4. The bad signings: Di Maria, Fellaini, Fred, Anthony......

  5. The failure to listen to respected managers: Van Gaal, Mourinho, Ragnick.

  6. The arguments: Sancho, Rashford....

  7. The short termism: OGS, Ronaldo redux.

  8. The unwillingness to communicate with the fans.

  9. The underinvestment in infrastructure.

  10. Dan Ashworth's hiring or firing, I don't know which, it all happened so quickly.

Name one player in the last 10 years who United improved after arrival? Name one player who left fitter than he arrived? Marcus Rashford got better the minute he left.

What other conclusion can one reach from the on-pitch performance at $MANU? Is the problem here not the debt per se, not the LBO per se, but rather the dreadful way the club is run? Transfers have been made. Quality managers have taken the helm. There must be something deeply rotten in the culture of this organisation. Something, and probably a lot of things, are not working. Shareholders are always responsible for this and ought to pay for it.

How do the Glazers exit?

I think the situation at $MANU is bad in a way that the fans have not yet faced up to. The risks seem very real. We should listen to Ratcliffe, who seems to be expressing some degree of buyer’s regret to me, if not outright remorse at least some scepticism. The club is probably one or two bad decisions away from an absolute calamity. And, worryingly, it seems to be still making as many bad as good decisions.

When shareholders strip the value of assets in an LBO, they can go bust. Think Debenhams. It is right to protest that the $MANU LBO should never have happened. If governments protect certain sporting events in the national interest for public broadcasters, they should protect certain assets, like football clubs, too. This isn’t a slippery slope into Marxism. It’s just a grown-up society determining appropriate limits.

There is then a friction point here: the Glazers still need to exit from their remaining (substantial) position in $MANU.

So, how do they exit?

The base case, presumably, is the hope that Ratcliffe can turn this around for everyone. I assume that’s the reason for selling to Ratcliffe: you realise some value whilst equity valuations are high, you know, while Comcast adds up how much it paid for Sky and how precarious that ‘buy through’ model is. You avoid the direct flak from the fans. You allow a different set of management skills to take a shot. Let's praise the Glazers for this last point. It suggests humility, wisdom, good judgment. Maybe. They don’t say. I wish they would.

I assume this base case assumes that with another manager, a different experienced CEO, new hands on the coaching and recruitment tillers, and the discovery of that elusive defensive midfielder, the Glazers might achieve a $6bn+ valuation.

I’m not so sure.

How much has actually changed? Lest we forget, the main asset of the INEOS Grenadiers, one of the most outstanding cyclists of his generation, of any generation, rode into the back of a parked bus at 50km/h. On a training ride. This does not bode well. It’s an awful metaphor.

So, how to change an LBO that should not have happened? An LBO that has over-extracted value from a club built on identity and memory, now left with a leaking roof? An LBO that allowed market participants like me to ‘go short’?

Atonement

Here is the question of the willingness to atone. In Atonement, McEwan sees the act of atoning as a lifelong struggle, one that can propogate intergenerationally. It carries the awful burden of guilt, it rusts the soul. When forgiveness can only come from the wronged, acceptance is often the only viable strategy.

A wrong has been done at United. Not a legalistic wrong. Nor a wrong of the rules of business. But the shareholders have wronged the club. They are disproportionately enriched relative to other stakeholders. Atonement is required to still these devils.

So here is a modest proposal.

It’s 'modest' because it is disproportionately small relative to the gains made by one stakeholder. It’s a 'proposal' because it’s highly unlikely to happen; there is no evidence from past actions that it might happen. But what’s needed here is a form of acceptance across the stakeholder base.

Amen.

And practically speaking?

  1. Collapse the dual voting structure. Everyone in the same boat. Sell some equity to the fans. Secondary, not primary. Just enough so that the proceeds allow the seller to gift the funds to the club to extinguish a portion or all of the debt. Clean slate. Atonement.

  2. Build something to be proud of. Turn the fans into partners. Turn the Glazer name into a chant and not a jibe. Do the right thing when so many billionaires are doing the wrong thing.

Is this likely to happen? Of course not. We can only live in hope that Ratcliffe has the management skills to turn this ship around.

I, for one, strongly doubt I’ll see United lift the Champions League trophy again. And I fear that the eventual breakdown of Sky’s business model will leave the revenues of $MANU perilously stagnant. I fear the debt will turn the club into a zombie, a ghostly variant of its former glory; I fear that the attitude of the fans to the Glazers will eventually drive the shareholders away, and the worst case scenario will play out.

This will be heartbreaking. For everyone.