TIVP040: Manchester United (MANU): Valuing a Football Empire w/ Daniel Mahncke & Shawn O’Malley

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25:00And for a limited time, you can use code STOCKS15 for a 15 % discount at checkout. I'm biased, but man, the NFL does such a good job with producing an entertainment product. I think we can differ on whether people actually enjoy watching the sport or not. But I mean, the whole thing is just a giant spectacle. And it really is amazing to me what they're able to pull off in real time for the broadcast. All the camera angles, the music, the sound effects, the on-field reporters, the halftime shows, incorporating highlights mid-game. Immediately after a play happens, you've got multiple different angles of highlights prepared.

25:39There's just so much that goes into the game and really the watching of the game, the viewership. And they make it look so easy. And while they do it in a way that just really squeezes out every opportunity for an ad. I mean, whether it's on the field with banners or commercial breaks, whether you're fully going to commercial break or commercial break for 30 seconds where you can still see the game, but you can't hear the audio. And then the other half of the screen has a commercial. there's just all of these elaborate ways they have found opportunities to increasingly monetize NFL viewership and you know I always complain about all the ads and yet I do keep watching the actions speak louder than words all those ads have not driven me away as a viewer and you know in my opinion and I think there are tens of millions if not hundreds of millions of Americans that would agree with me the NFL is just such a good product it would be almost unfathomable for me to not watch.

26:36Every time I feel this instinct to rebel and say, I'm tired of the ads, I'm sick of it. I don't want to pay for all these different streaming subscriptions. I don't want to pay for cable. You know, I try to step away and I'm going, God, I really wish I could see the end of this game right now. So, you know, with the point being beyond the differences and the audiences and the culture, you know, there's just so much more promotion baked into NFL games structurally that, of course, they're going to be way more monetizable. And, you know, that's going to translate to more value for the franchises.

27:07NFL games are almost like a shrine to capitalism. I think if you watch the games through that lens, you see it very differently. And I totally get why that's a turn off to people like you, Daniel, especially for international viewers who don't grow up watching the sport and have the same nostalgia around it. But from a business perspective, I got to say, I respect it. No one gets as much revenue out of every second of game time as the NFL. They have really mastered it. And the benefits trickle back to the teams and the franchise values, of course, like I said. And, you know, we're supposed to be talking about Man U, but now I'm sitting here wishing I had a chance to own an NFL franchise.

27:45I would guess it's only a matter of time until we get the chance to actually look at an NFL franchise. But speaking of optimizing the sport for capitalism actually brings us to the second point, which is the structure of the game and even more so the structure of the leagues. And this is really interesting because you would think that if the US has basically cracked the code on how to monetize sports, then all the leagues would be valued more or less the same with only slight differences based on popularity or viewership. But that's not really the case. The NFL, just like the NBA and Major League Baseball, is a closed league.

28:17There are 32 franchises and those 32 sports are pretty much fixed. So no matter how bad your season is, even if you finish dead last, you're still in the league the following year and you will still collect your share of those enormous TV contracts. When you look at European leagues, that's the complete opposite. If football operates in an open system, and that means if you finish at the bottom of the Premier League, you get relegated down to the second league. And with that, you lose out on hundreds of millions of dollars in revenue. when we put on our investor glasses it kind of feels like the difference here is between owning a stock where your downside is capped with an nfl team for example versus one where if things go really badly you can get booted off the exchange altogether so there's almost this asymmetry to the downside that's a low likelihood with a team like manchester united but the possibility exists in a way that, you know, there's not even a minor league for NFL teams.

29:13And even if, you know, for the NBA G League, you know, the Lakers are never getting relegated to the G League because it's just literally not possible. And we'll also talk about it later, but United was pretty close to get relegated. And the closed league system in itself is just one piece. The NFL also uses salary caps, so every team can only spend more or less the same amount on player salaries. I think about$270 million in recent seasons. In the Premier League, though, there is no cap. So Manchester United can go about and spend almost$250 million on wages in any given year. But smaller clubs like Burnley, for example, which you definitely do not know, spend less than$70 million on player wages.

29:53And you could almost say that American sports leagues are more socialist and European leagues are more capitalistic. But the second level thinking here is that competition is much more interesting in American football than in European football, which, again, is way better for a capitalistic system. And so the Premier League has a relatively open title race each year and relatively means there are like four to five clubs that actually play and have a realistic chance of winning the title. Whereas in most other European leagues, they are basically dominated by just one or two big clubs. The German League, for example, is dominated by Bayern Munich, the French League by Paris Saint-Germain and the Spanish League by Real Madrid or Barcelona.

30:31know yeah there is sort of a more egalitarian approach to like the nfl for example where almost by structure the league does not want the same team to you know obviously you have a couple years in a row where the same team will be good but they don't want just year after year decade after decade of the same franchise dominating and you know there's subtle ways where you know for example with the draft pick system if you're the worst team in the league you get the first pick of the next best class of college players rising up. So that is a great way to get the next big superstar on your team and lift your franchise up.

31:05Whereas the team that won the Super Bowl, they pick last. And so they get last dibs on the next cohort of talented players. And then you have these things with the salary cap where if you have a star quarterback, for example, my team that I root for the Washington Commanders, they just drafted this great quarterback, Jay Daniels, and he's really promising and he's on a rookie contract, which means he's not getting paid a ton of money. But when we have to go and re-sign him, he's going to get this massive contract which is going to make it harder for us to pay anyone else and so you know maybe we're good now but you have this limiting factor of you know with the salary cap you can only spend so much and if you want to keep the star players that you've groomed over time you're going to have to eventually pay them what they're worth and that just translates to like i said there's more egalitarian system where just because you're really good one year does not mean you'll be really good for the next five years and i think that's proven out by the fact that in the past decade alone, you have six different teams that have managed to win the Super Bowl.

32:01And in my opinion, that makes the NFL more exciting to watch for fans and for all the teams involved. And from an investor's point of view, I think it's very attractive as well. Every franchise is guaranteed a meaningful slice of the pie. No team has to fear that they'll make significantly less money next year. And even the more casual fans will tune in whenever the playoff race heats up. And, you know, we have these teams like the Lions, for example, the Detroit Lions, that for decades were just absolutely terrible. And that's still a multi-billion dollar franchise that I don't know if they sold out games for a long time, but still got a lot of attendance, a lot of fan support.

32:35And then now, you know, in the last two years, you've seen them become really, really good. And, you know, you have all this pent up almost spending that, you know, people who have, who suffered through the team's bad times for years, now their time has come and they're as big of fans as ever. So like I said, you know, it really balances out in a way. that I think is a little bit different than some of the European football leagues, at least from what you've told me. And, you know, the title race in European football leagues is sometimes already decided weeks before the season ends. And again, that's just kind of the opposite of, you know, the kind of the fervor around the NFL accelerates as you get closer to the end of the season and as the playoffs come around.

33:16And to be fair, I think the relegation, though, does add a bit of excitement or kind of a variable to the equation that North American sports leagues don't have. If your club needs to score points or they go down a league, I mean, that would be pretty nerve-wracking and that would definitely, you know, have me tuning in to see what happens. Sean, I can tell you from experience, unfortunately, that is as nerve-wracking as possible if your team is still fighting to not get relegated in a different year. I mean, one question we still haven't yet fully answered with all of this is why the NFL is so much more successful economically than, say, the NBA, for example, even though they operate under pretty similar rules.

33:57And that mostly goes back to how the NFL embraced television, even back in the 1960s. They made what was a pretty revolutionary decision at the time because they said instead of selling the TV rights based on the size or the importance of the team, they collectively sold them and split the money equally among other teams. And that's basically what you alluded to. And that's the reason why even a small market team like the Green Bay Packers, which we talked about earlier, could grow the same way as the Dallas Cowboys or the Miami Dolphins. And when you combine that equal TV money with the scarcity of games, every NFL match becomes a must-watch event.

34:33And a couple of weeks ago, you mentioned to me how you're looking forward to the season. And I could barely believe how short the season for NFL teams actually is. I mean, only 17 regular season games per team. Compare that to the Premier League, where you have 38 games plus cups and then also international competitions, which can easily push that number up to at least 50. Or the NBA with 82 games. And I still remember when I met one of our Intrinsic Value community members in Omaha at the Berkshire meeting this year. And he told me that in baseball, they play over 160 games per season, which for me was totally mind-boggling.

35:08Speaking of which, just since you did mention our Intrinsic Value community, I think I'll take a moment here just to let everybody know. we are taking applications for our third cohort of members who are looking to join the group. We originally opened up 20 spots and almost half of those are already gone at the time of recording. So if you're interested in digging deeper into the investments that we do here on the show, meeting like-minded investors, and as you just alluded to, Daniel, joining us for our meetups in Omaha and Berkshire weekend or our weekend in New York that we're planning for fall of next year, we have a link to apply in the description, or you can go straight to theinvestorspodcast.com slash intrinsic value community.

35:52It's definitely worth checking out, I would say. And perhaps I'll book an extra day next time I'm in the States for one of our community events just to visit an NFL game. I think just experiencing how a game with that many breaks feels alive is something that I want to see. The Premier League didn't sell its games on television in a big way until the 1980s. And by then, the NFL had already optimized its spot for TV. I'm talking about timeouts, replays, Monday night football, Thursday games, all to maximize ad slots and viewer numbers. And today, the NFL TV rights bring in over$10 billion annually, far more than the Premier League's$2 billion.

36:29I mentioned this earlier, but the NFL has probably done the best job in the world when it comes to setting up games in a way it allows for the maximum amount of advertising and monetization to occur. About 25 % of an average NFL broadcast is commercials. And the 50 minutes of commercials are distributed over 20 commercial breaks. And I've actually heard that the average NFL broadcast, which as we know, can go for three or four hours, only delivers 18 minutes of actual live play, 18 minutes of actual action, since there is a lot of this time you know before the snap and then there's runoff between plays i mean that probably sounds terrible to all the european listeners who are used to uninterrupted 45 minute halftimes but it really is part of the sport and the culture around watching it i mean sometimes the ads themselves are actually pretty entertaining to watch and then there's this communal culture around watching football where you have you know tailgates and backyard barbecues playing fantasy football with friends i mean the breaks in action kind of actually really open the door for socializing.

37:33And the other thing is that really devoted fans will spend a lot of time switching back and forth between games with something like NFL Red Zone or NFL Sunday Ticket. So if your team is on a commercial break, you're not just sitting there suffering through every single commercial break. You're probably checking in on three or four other games to see what's going on. And I'm not sure how it's different from how people consume soccer or football in Europe, but there is kind of a league-wide interest in the NFL. Like I said, you're maybe not just tracking what your team is doing, but you also want to see, you know, since a lot of the games are being put at the same time, oh, what's going on with Josh Allen?

38:11And how is Patrick Mahomes playing? And how are the Cowboys doing? Is my division rival losing? You know, stuff like that, that I think people are actually kind of add to the experience of an NFL Sunday, where it's not just watching one game and watching your team, but it's a whole day of American football? It's definitely the same here. I think the most watched product is a so-called conference in which you jump between all the games that are currently on. The only problem from an economic standpoint is that halftime is at the same time for every team and that's the only ad break. So you just can't skip any ads by switching to another game and there are no more opportunities to make more money for the clubs and the TV broadcast.

38:51So economically, and we said that repeatedly, the NFL model is just so much stronger and that it's no surprise officials have tried to steer European football in the same directions. A couple of years ago, they actually announced the idea of a so-called Super League and it was supposed to be a closed competition, just like the NFL, featuring the biggest clubs from each of the top five European leagues. And the domestic leagues would have still continued, but the Super League would have replaced the Champions League as the main international competition. The idea came out of a clash between the two biggest organizations in world football.

39:23But what's more interesting for us is that the economic logic behind this is so compelling. The driving force behind it was Florentino Perez, who is the president of Real Madrid. And Real Madrid is the most decorated club in football. And financially, they're right up there with the Dallas Cowboys as one of the very few franchises on earth that generates more than a billion dollars in revenue each season. And United would have been part of the Super League as well, despite their not so good sporting performance each year. and the Glazer family would have been involved in the league's board. So for clubs like United, where the qualification for the Champions League isn't always guaranteed, a closed Super League would have meant much more stable earnings and just significantly higher broadcasting revenue each year.

40:06If this were to happen in the future, Manchester United's value would likely experience a significant increase, much more than you could expect from just good on-pitch performance. But for now, and that's kind of the bad news here, the project was stopped when clubs backed out due to serious fan protests. So tell me if I'm mistaken, but it sounds like qualifying for the Champions League and really just overall performance on the pitch plays a pretty big role in the financials of these football clubs. And that's a big contrast with the NFL, where we've talked about a little bit on-field performance.

40:39Of course, it matters a ton, but it doesn't really move the financial needle maybe in the same way since all the TV money is pretty much split equally no matter what and then you have the salary cap that prevents hoarding of the best players at one team and then the worst teams will get the best picks the next season you know the Cowboys are the most valuable franchise in the NFL and they have not been to a conference championship game in like three decades they haven't been good for a while and as a Washington Commanders fan that brings me some joy to say since they are our rival but you know maybe we should dig into the consequences of this kind of on-pitch performance a bit more and what it does mean for European football clubs.

41:17From what I know, Manchester United's glory days are also a bit behind them as well. Maybe they're kind of like the Dallas Cowboys. They haven't exactly been lighting it up in recent years. So how has that lack of success actually shown up in their finances? Well, for soccer clubs, performance really is a key part of the money-making machine. And we'll get into those dynamics in a moment. But since I just mentioned the Glazer family and their role in the Super League, it probably makes sense to briefly talk about United's owners in more detail because it's the Glazer family and they are investors you might know because they also own the Tampa Bay Buccaneers and they acquired Manchester United through a leveraged buyout about 20 years ago.

41:55They borrowed hundreds of millions using the club's assets as collateral, which loaded United with about$800 million of debt. And given what you know now about 40 minutes into this podcast on basically football and sports culture, I guess you can imagine that fans were more than just not happy and it came to massive fan protests once again. I won't pretend I know much about the Glazer family, but I do know the Buccaneers have done decently well under their ownership. The Bucs have won two Super Bowls since the Glazers took over, one of which was famously with Tom Brady a few years ago. And they're also known for some philanthropic contributions to the community in Florida and Tampa.

42:33So maybe I'll just put it this way there are definitely owners who are much much more disliked than they are in the NFL interesting because their image in the UK couldn't be more different they don't really give interviews so there's just not much you know about them or their personalities and since the legendary coach Sir Alex Ferguson who I referred to earlier left United in 2013 the on-pitch performance just kept getting worse almost every single season they haven't won a single league title and last year as I said, they finished 15th in the league and they almost got relegated. There are numerous examples of prominent and historic clubs, massive fan bases that have been relegated once, they never returned to the top.

43:12And not only in England, but in all major European leagues. And as a Hamburg fan, I know that feared too well after being the only German club to never be relegated from the first league. It happened for a first time seven years ago. And let me tell you, Sean, getting back into the first league was a long, long journey and the financial burden of relegation is just huge. It's been estimated that if Manchester United had actually been relegated last season, they would have taken a hit of around$80 million in broadcasting revenue alone and since the club didn't have to think about ever getting relegated.

43:43They don't have relegation clauses with most of their sponsors, so it's difficult to assess how much money they would have lost on the commercial side, but due to their size, that's a big part of the United's business, almost half to be exact. And if you look at other established clubs that did get relegated, the drop in commercial revenue was often around 30%. For United, that would have been another$100 million or so that they would have lost immediately. You know, before we started this discussion, I really wouldn't have thought the structure of the leagues and all these financial roles played such a big role in explaining why NFL or NBA teams ended up being worth so much more than soccer clubs.

44:20And I would have assumed almost all the difference came down to advertising opportunities and maybe just the sheer size of the U.S. market. But when you look at the massive revenue swings, missing out on the Champions League or, you know, in the worst case, getting relegated, even for billionaires who don't always care about short term profits, they probably have to think twice before investing in some of these clubs. And I mean, that kind of potential hit is just too big to ignore. And I'd imagine you also see pressure on the match day revenues, right? I mean, maybe fewer fans are showing up or clubs are being forced to drop ticket prices if the teams are relegated.

44:54Well, football fans are usually very loyal. To bring up Hamburg again, even after seven years stuck in the second league, they didn't see any real drop in matchday revenue. The stadium was still packed with almost 60 ,000 fans every single week and ticket prices didn't have to come down either. So I would assume a club like Manchester United wouldn't see much of a decline in matchday revenue either. What would be more damaging is the gradual loss of prestige that just comes with playing outside of the top league of the Premier League. And maybe not just after one season, but But the longer it drags on, the more chips away at United's brand value.

45:27And for the financials, the on-pitch performance of football clubs is definitely important. Central TV and commercial money do include kind of like an equal floor. But that floor is far smaller than the NFL's. And a notable share of the payout depends on where the team actually finishes the season and in the league. Because that also means how many live broadcasts they get. And last season, every Premier League team received about$120 million as its central TV share. And then on top of that, each position in the table was worth another$4 million. And if you qualify for the Champions League, you get an additional$22 million just as a starting fee, with the potential to earn much more, depending on how far you go, to be pretty big.

46:10Now, United has been pretty far from consistent Champions League qualification in recent years, but I still went through the payout rules to see what it might look like if they qualify. And without boring you with the math, just from making it out of the group stage, United would pocket around$100 million, reaching the quarterfinals, would put that number closer to$120 million. And if they went all the way, which let's be honest, would be a football miracle by now, they could add another$50 million on top. So point being, if you're a club that reaches the Champions League often, chances are you also pay salaries and make transfer in a different category than other clubs.

46:46And when you suddenly miss out on$100 million because you don't qualify for the Champions League, that just becomes incredibly expensive for the club. Not only are the stakes super competitive from a sports perspective, but so are the economics. I mean, we've said it a few times already, but when you buy an NBA or an NFL team, it almost feels like you can't lose. You know the sport is only going to get bigger and the teams will continue to appreciate, but you don't know that in the same way for Man U. So naturally there is kind of an additional premium in the valuation of North American sports teams comparatively because I think there is some more certainty at the franchise level.

47:22It's sort of like how these recurring subscription businesses command higher PEs than cyclical businesses. That stability from an investment perspective is actually very valuable. And zooming into Manchester United in particular, maybe you can give us a breakdown of how big each of its different income streams are. There are three major revenue drivers. So that being commercial, broadcasting and match day. Commercial is the biggest chunk, making up about 45 % of the total. That's all the sponsorship deals, the retail operations and also the merchandising. So basically it's a part of the business where United monetizes its global brand.

47:58Broadcasting is the second biggest pillar worth roughly a third of overall revenue. And this is where the performance on the pitch matters most. league position, Champions League qualifications, all of that flows straight into the broadcasting line. And as you would expect, it's also the most volatile part of the business, especially given how inconsistent United has been in recent years. And then the third piece is match day revenue. Over the last five years, those numbers have looked pretty up and down, but that has mostly been due to the pandemic. In a normal year, match day revenues are very stable for United.

48:29The stadium, which is called the Old Trafford, is packed every single week, and there's no sign of that changing anytime soon. Speaking of profitability, is Manchester United even a profitable company? I mean, when I hear about all those transfer fees, the wages to the players, and then just some of this missed on-pitch success, I feel that there's maybe not much left over at the end of the year for shareholders. Well, unsurprisingly, the two biggest cost lines are wages and player amortization. Wages alone are more than half of revenue, and that's actually an improvement. A couple of years ago, wages were still running at about 66 % of revenue.

49:05So roughly 10 percentage points higher than they are today. And then you've got the amortization of player contracts. And that's basically just the accounting treatment of transfer fees, spreading them or the cost out over the life of each player's deal. In 2024, that line came out to about$250 million. And when you add wages and amortization together, they eat up about 80 % of the club's income before you even factor in anything else. And last year, on top of that, you had some additional one-off costs that were tied to the Jim Ratcliffe takeover because Sir Jim Ratcliffe is a British businessman and he bought 27 % off United and took over control over the entire football operations.

49:45He paid$1.6 billion for that stake, implying a valuation close to$6 billion. dollars. So taking it all together, it does sound like they operated at a loss. Is that right? Yep, that's true. It's a total loss of over$100 million. And there generally are not many years in which United is operating at a loss, although the league is trending towards more profitability in general. I know this might sound unattractive to many investors. And as value investors, We obviously don't like loss-making companies either, but you don't really buy these assets for their operational performance. These clubs are trophy assets for the ultra-rich, which is something we talked about at length during the Madison Square Garden episode that we'll link to in the show notes for anybody who wants to check that out.

50:33But it is really like buying art. I would say you're not really, even though there are cash flows, you're not really investing in it for the cash flows. You're buying it for the expected appreciation. You're hoping someone will be willing to pay more for it down the road since there are some serious bragging rights that come with owning professional sports franchises. And historically, that has actually been a pretty good bet. And while that can work, I don't think either of us would say it fits our definition of investing, let alone value investing. It really is more akin to speculating, which is not necessarily gambling, but speculating.

51:12Speculation, in my definition, is when you're betting on something to be worth more for reasons other than the discounted value of the cash flows it can generate. So this is not a slight against gold, but by that definition, gold is a speculation, which is okay, but that is sort of what it is because it's not being valued like a business in terms of the discounted future cash flows that we expect the business to be. so it doesn't necessarily make it gambling though and with Man U being unprofitable and having real no pathway toward being consistently profitable that's why I say it starts to look more like a speculation it starts to look more like buying gold which you know in a diversified portfolio is part of different you know wealth accumulation and protection strategies there is a role for that just to be clear but it's not like we're trying to look at Uber's cash flows over the next decade and do a DCF and say, we think Uber is worth$100 a share or whatever it is.

52:13It's a very different way to think about it. And yet, at the same time, using Forbes' valuation estimates does imply 100 % upside on today's stock price. And it looks like the Jim Ratcliffe deal is another example that investors are willing to pay closer to$6 billion than the$3 billion the market is currently willing to pay for United based on the implied valuation, where we just multiply the number of shares outstanding by the share price. So with that said, do you see anything that could close that valuation gap anytime soon? Well, the valuation gap isn't going to close just because of better results on the page, not even if United makes it back into the Champions League.

52:56I would say the most likely way is through a sale of the club. That's not only true for United, though, that's true for every sport franchise out there. As you said, this is kind of the speculation part of the investment. Even the more profitable teams or NFL franchises get sold evaluations that are hard to justify if you just look at the financials and the operational perspective of the club. And a couple of years ago, United's market cap actually jumped to over $4 billion on rumors that the Glazer family were exploring a sale. And there were two serious parties involved back then, Qatari Investing Group and, as you said, Sir Jim Radcliffe.

53:31And The Qataris were reportedly willing to buy the entire club at a valuation of$6 to$7 billion, which lines up with Forbes' value estimate. But apparently the Glazer family hesitated. Some family members seemed interested in selling, while others apparently weren't. And maybe that was just the negotiation tactic. But whatever was the reason, the sale did end up not going through. And reports suggested that the Glazer family wanted$8 to$10 billion, and the Qataris just decided to ultimately walk away because that's just too much money for a struggling Manchester United team. And Redcliffe later came in and bought about a quarter of the club at an implied valuation, as we said, closer to$6 billion, which would suggest to me that the Glazer family might just never had the idea of actually selling the entire club and giving up full control in the first place.

54:19Obviously, this isn't the kind of investment we normally focus on. But that said, it feels like every year we're seeing a new record set for the sale of a sports franchise. I mean, just two years ago, my team, the Washington Commanders, changed hands for a then record of$6 billion. Then in March of this year, the Boston Celtics went for$6.1 billion. And only a few months later, that record was just totally blown out of the water by the iconic LA Lakers, who were sold for a staggering$10 billion. We spent so much time this episode talking about the NFL and how much more valuable those teams are.

54:54And then just a couple of weeks ago, So the LA Lakers deal came out and it just blew everything out of the water that we currently have seen. So I imagine that NBA teams will also get significantly higher valued in the time to come. But what I generally like about the idea of investing in sport teams, even if it's speculation, is the level of certainty, at least behind the product. If you invest in art or in luxury collectibles, there's always the risk that taste changes and something falls out of fashion. But football and American football, I just don't see either of those sports disappearing.

55:26And despite the huge value increases, I don't really see them going down in price either, at least not in the long term. The catch, especially with football clubs, though, is that an individual club can lose its relevance. If the team underperforms for too long, it can slip into a downward spiral that damages both the brand and also the business. And that's a risk you really don't see to the same extent in closed leagues like the NFL or the NBA. And that said, Manchester United is such a massive brand that as long as they remain in the Premier League, it's hard to imagine them fading into irrelevancy.

55:59To give some perspective on the development of valuations, in the very first Forbes list of global soccer valuations, it came out in 2004, I think. And back then, United was still valued at$1.2 billion, while the average Premier League club was valued around$450 million. Since then, variations have increased roughly fivefold. There are plenty of reasons for that, but if you had to boil it down to just one, it's the rise in both the number and the wealth of billionaires. In 2000, there were only 470 billionaires worldwide with a combined net worth of$0.9 trillion. Today, there are more than 3 ,000 billionaires and together they control an astonishing$15 trillion.

56:39dollars and you know if you're someone like Larry Ellison in a matter of a day you can make a hundred billion dollars if your stock performs well so I think that speaks volumes so at the end you have a fixed supply of sport teams in the US leagues even more so than in European football and just a rapid increase in potential buyers of these teams and if you ask me even though it's a bet that's a pretty attractive setup. Yeah I almost feel like betting on sports team valuations is actually a way of betting on wealth inequality as the rich have gotten richer faster than the rest of society, they have continued to basically bid against each other for the most exclusive things money can buy.

57:16And there's nothing more exclusive than owning a major sports team. And I think we've seen that reflected in a number of ways when I talk about these exclusive things that are actually rising faster than inflation, whether it's private universities in the US, exclusive vehicles like Ferraris, art, all of these things have risen much, much, much faster than the general inflation rate. And I think, again, that is really reflected by the point that the people at the very top have compounded their wealth faster than others. And they're basically bidding against each other for these few finite things that money simultaneously can buy and can't buy.

57:52So as long as that trend persists, regardless of the underlying economics, I do think valuations for sports franchises will keep climbing higher. And I listed some of the biggest sales of sports teams in recent years, a moment ago, but one club that I didn't mention was Chelsea FC, although it is pretty far up on the list. In 2023, Chelsea was bought by Todd Boley and the investment firm Clear Lake Capital for$5.4 billion. And it was the biggest sale of a sports team at the time. Without being a Premier League expert, obviously, to people who have probably gotten tired of listening to me talk about it throughout this episode, I would guess that Chelsea's a pretty good comp for United, but I don't know, maybe you'll tell me otherwise.

58:32No, absolutely. I mean, on the pitch, Chelsea has been way more successful than United in the recent past. So probably fans of both Chelsea and United wouldn't agree here with us. But generally, both are part of the top six clubs in England. And I guess it shows that Forbes radiations are pretty accurate, even in these international sports like football. And football clubs are generally valued on a sales multiple basis. So when Chelsea was bought, the multiple was slightly higher than five, although extra costs increased the price significantly. And that's also the multiple you ended up paying in the end.

59:03So considering that United is still the much larger brand and generates about$300 million more in revenues, which is quite significant for clubs of those sizes, I think it's fair to say that United would be valued much higher in a scenario of a sale. When we think of potential catalysts for a Manchester United sale, what comes to your mind? Are the Glazers still interested in selling the rest of their stake? Or has it become less likely with the new minority holder who takes care of all the football operations? Right now, there aren't really any real rumors about the Glazers selling their remaining stake.

59:40And if I had to guess, I would say they'll probably hold on to it for now and hope that the results on the pitch improve under Jim Ratcliffe's leadership. But there are some other angles that are quite interesting. One would be the new stadium project. Over the past year, there's been talks of building a brand new, quote unquote, New Trafford stadium with around 100 ,000 seats instead of just renovating the old Trafford, which was basically the old stadium of Manchester United. And it would be a million dollar undertaking. Radcliffe has already committed a few hundred million toward the infrastructure, but the city of Manchester has made it pretty clear, at least to my knowledge, that it won't foot the bill.

1:00:16So at this point, the project is still uncertain, both whether it will happen and even if it happens at all. But if it does, and if it should become reality, it would be a huge thing for the club and also, of course, the shareholders. Stadiums are such a symbolic thing, sort of like the franchises they represent. I'm not sure how well the specific economics of any mega stadium work out to be, but there's so much depreciation that can be written off for taxes. And more importantly, the stadiums become these economic hubs revitalizing. portions of cities that local governments will then want to incentivize by providing grants and tax breaks to help make them happen.

1:00:53At least here in the US, we see that a good bit. So they're almost more like these public-private partnerships in a lot of cases, aiming to build something that redefines an entire city's identity, which goes well beyond just basic calculations of profit and loss. I must admit, I was a bit surprised when I heard about all these massive stadium projects, both in football and also American football in recent years. And it might not speak to my understanding of business, but I wondered why spend so much money on new stadiums when it could be better spent on players on the pitch. But it turns out that especially in football, infrastructure investments are exempt from the usual financial regulations of the Premier League.

1:01:32So while technically every club is only allowed to lose about$140 million over a three-year period, investments into stadiums or other infrastructure, they don't count into that number. And that's, no pun intended, quite the game changer because not only do new stadiums now mean more seats and higher prices, but they also mean more events outside of football. So you can host global tiers for stars like Taylor Swift or Beyonce, and they bring in tens of millions in extra revenue. And all of that income helps with financial fair play compliance too, without counting into it beforehand. And it's not just concerts.

1:02:07I mean, United's proposed new stadium is meant to be part of a huge, massive regeneration project. We're talking about hotels, retail, restaurants, an entire entertainment district basically in the city of Manchester. And depending on how much of that development United controls, it could create an entirely new revenue stream for the club. And Real Madrid had recently built a new stadium for about$2 billion. And before the new stadium, Real Madrid's matchday revenue was about the same as Manchester United's. Now they make almost$150 million more per year. So if and when that new stadium comes, it would be a huge thing and potentially driving the stock price up significantly without any rumors of a sale of the club necessary.

1:02:50These projects have become even more important in recent years since, as you told me, broadcasting revenue has actually been rather flat. So focusing on increasing matchday revenue is a string they can pull and could help balance out the slower growth in broadcasting. And on that front, though, there is good news in the world of broadcasting since international growth is starting to outpace domestic growth, especially for clubs like United with the biggest international fan base. There's maybe some real room for optimism there. But just going back to the catalysts for closing the valuation gap.

1:03:24I mean, do you see anything that could force the Glazers to sell their share? Well, a second potential catalyst for the stock that leans more toward the possibility of the Glazer family selling is regulation. Two years ago, the Premier League tightened its owners and directors test by adding human rights and sanction clauses. So they also introduced something called an acquisition leverage test, designing to stop the kind of debt-heavy buyouts that we actually saw with the Glazers and United back in 2005. So on top of that, an independent football regulator is expected to come in in the following years.

1:03:58And this is just speculation on my part. But if the rules continue to get more strict, I think the Glazer family might decide to sell before the bar gets raised even higher, because that could downgrade the value of the spend, the value of United's franchise. Another, and again, very speculative tailwind for United's valuation and for a possible sale is the growing interest from the Middle East in acquiring not just players, but basically entire clubs. The pool of money there seems to be endless, and with Saudi Arabia hosting the World Cup in 2034, they're doing everything they can to establish themselves firmly on the football map.

1:04:35And to put that into perspective, the Saudi League spent only about$50 million on players in 2022, and just one year later, the figure had jumped to over a billion dollars, second only to the Premier League. Qatar's another well-known example. Back in 2011, they bought the struggling French club Paris Saint-Germain, which we already talked about, for$100 million. Today, PSG is one of the biggest clubs in the world, valued at over$4.5 billion. So there's a lot of money coming in and valuations, they can go sky high if you buy the red investment. The entire situation reminds me a lot of Madison Square Garden Sports, which I feel like I'm saying for maybe like the fifth time today, so I apologize.

1:05:15But when I covered it, the stock traded at about half the valuation that Forbes gave it, which maybe sounds familiar here. You also had a fairly unpopular owner, but no immediate catalyst would suggest that the team would be sold anytime soon. And in that aspect, it's almost similar to the investment thesis for Smith & Wesson, which is a company we covered a few months ago, where you basically have to wait for a specific event to happen. And then in the meantime, there's not really any hope for organic stock increases. In other words, the business is not compounding. retained earnings are not being reinvested in a way that continued to grow the earnings per share consistently over time.

1:05:54You know, with Smith & Wesson, though, at least, you would have actually received a dividend while waiting, which you don't hear. And with MSGS and Manchester United, like I said, that's just not the case, which makes the opportunity costs even a little bit more painful to bear if, again, those retained earnings are not really compounding. And then you also have the asymmetric risk of a club actually getting relegated and then that causing them serious financial trouble? The idea of owning a part of Manchester United is just really interesting. It's not just a top 10 franchise in football. It's really up there in the top three and arguably even the biggest one.

1:06:30And that reduces a lot of the risks involved just because there will always be interest from investors in owning Manchester United. When United performs badly, it might even get more attractive because the likelihood of the Glazer selling increases. and I really don't see a lack of demand for that club. But an investment in United is essentially a bet that someone will come in, pay more and thus move the stock price drastically and most importantly sustainably. Even on pitch performance, everything that moves the stock doesn't make it a compound. Like one year later, they might not be in the Champions League anymore and the stock goes back down.

1:07:04So that just makes it a pretty difficult investment in its nature. So when you look at the stock chart, it's a wild up and down. It actually looks very similar to Madison Square Garden's stock. And in contrast to MSGS, though, United owns its stadium and their land. So you might argue this serves as somewhat of a margin of safety. However, selling it would be a very complex process. And it's incredibly unlikely. Even in a scenario where you build a new stadium, the Old Trafford would just be repurposed instead of sold. So, yeah, if we assume United can close the valuation gap, or let's say 80 % of it, in the next three years, you would look at a three-year CAGR of about 20%.

1:07:42If we assume it only happens in 10 years, the CAGR is just 5%. Although to be fair, valuations are likely much higher at that point. Still, today I just don't feel like a bet on United would be our best option. I'll keep an eye on United's season and how the stock reacts, but without a clear catalyst in sight, I wouldn't suggest adding ManU stock to our intrinsic value portfolio at the time. If this thing spit off enough cash to do some serious stock repurchases, that might get me interested enough to consider it since there'd be no plausible way for the valuation gap to close without a sale of the team.

1:08:19But otherwise, without some special insights in the Glazer family, it just feels like you're signing up for indefinite investment uncertainty without any of the non-financial perks of owning a sports team, let's say. And I honestly think a lot of value comes from being able to show up to the games, watch from a private box, Fire the coach if you don't like them. We're just giving input on what to do with certain players. That control, that fame, the clout, all that stuff are really what you're paying for as somebody who's buying a majority stake in a franchise like Man U at$6.5 billion. And as minority shareholders, you're just not getting any of that.

1:08:59So the question is, should you buy in at the same valuation? it's almost like you need two different share classes of stock for for a company like this and so from an investment point of view i do think this one is pretty easy i agree with you that we should probably pass and i guess a more interesting question to me is what would have to happen for you to find the stock more compelling well first of all i think one interesting part about manchester united and their owners is that a lot of the value that you said would be there for the owners because you basically own a sports team like manchester united it's not the case with Glazers.

1:09:30They don't show up to a private box. They don't even go to the stadium because the hate for them is so big that they're being followed around throughout the stadium. So they don't even show up. So I think a lot of the prestige and the benefits of owning a club like Manchester United are not really there for the Glazer family, which might be somewhat of an incentive to sell the club rather sooner than later. I mean, otherwise, share buybacks would just be a dream. And while I'm not really a dividend guy, even if United pay me a dividend of four to five percent while I wait for the club to be sold or for the on-pitch performance to improve sustainably going back to the Champions League maybe even surviving the group stage or perhaps even just having a Super League format and even just is probably a bit of the wrong wording here because that's probably the least likely catalyst to realize but all of that would make the investment case just so much more attractive and it would be similar as you said to the Smith & Wesson investment case just with a much more attractive asset behind it at least in my opinion but I consider both buybacks and significant dividends is highly unlikely if you look at the financials of Manchester United and where the club stands and with that I would say both of us have now covered sport teams we've covered an NBA team and NHL team and now also a Premier League team if we can get our hands on an NFL team we probably will do another episode but otherwise I think we're good for now.

1:10:51So how about you give us your hints for the next episode, which I would assume has nothing to do with sports, but brings us back to the good old compounders. Yeah, we do love those compounders. And yeah, I mean, this next company is one of those behind the scenes toll booth businesses that we like to see. If you've ever applied for a mortgage, this company was almost certainly involved. If you open your credit card app, you'll probably see a score from them, assuming you're in the US. And if you've been an investor in the company over the last few years, well, let's just say you have done very, very well.

1:11:26Well, we have to hope that it's continuing in the future because we are not yet shareholders. All right, today I will close it with a quote by Wells, United's legendary coach, Sir Alex Ferguson. He said, we had a virus that affected everyone at Manchester United and it was called winning. Unfortunately for United fans, the team has been cured of that virus for a long time. So let's hope it will come back soon and we will see you again next Sunday.