Manchester United's Stock Sale Should Serve as a Warning Sign for Other Clubs

Mike MillerContributor IIIJuly 4, 2012

Should Sir Alex Ferguson be worried about Manchester United's debt situation?
Should Sir Alex Ferguson be worried about Manchester United's debt situation?Clive Mason/Getty Images

Manchester United, arguably one of the five most famous sports teams in the world, announced Tuesday that they selling shares of the club on the New York Stock Exchange in order to raise $100 million to help pay down the club's debts, according to Reuters and the club's Initial Public Offering filing.

Most of the debts were incurred when Malcolm Glazer and the Glazer family purchased the club in 2005 in a leveraged buyout for approximately $1.3 billion dollars (£800 million). According to Reuters and the filing, the club's debt still amounted to $663.7 million (£423.3 million) as of March 31st.

The shares being offered will largely be symbolic.

These shares will be Class A ordinary shares that will only hold 33 percent of the voting power of the club. The Glazers will still control the Class B shares, which will have 10 votes each compared to one vote for each Class A share, according to another Reuters article. The B shares will represent a 67 percent majority of voting power.

With the club's debts, it's unlikely the shares will pay any dividends for several years, if ever.

Symbolic shares are not a new phenomenon.

Late last year, the Green Bay Packers sold 250,000 shares of stock to raise money for capital improvements to Lambeau Field.

According to Yuval Rosenberg of The Fiscal Times, the shares, which sold for $250 plus a $25 handling fee, were the worst investment ever. The shares would never go up in value, would not pay a dividend and could not be sold to anyone except back to the club itself. The club would pay literally pennies (not even pennies on the dollar), just 2.5 cents, to buy back the share.

But why are Manchester United in this position?

With a stadium capacity at Old Trafford of over 75,000 and tickets going for £30-£52 each ($46.80-$81.10), Manchester United can bring in almost $4.8 million per home match. The Red Devils sell more merchandise than any other club in the world—only rivaled by Real Madrid. Cash inflows should not be a problem.

However, most top clubs budget based on expected results, and when those results don't happen, clubs can run short.

There is no salary cap to protect clubs from themselves. Manchester United unexpectedly failed to advance to the knockout stages of the UEFA Champions League, costing the club millions in ticket sales and media rights they normally would receive.

An FA Cup run that could have boosted the morale and coffers of the club got cut short by Liverpool in the fourth round. Manchester City's magical final minutes on the final day of the season against Queens Park Rangers denied Manchester United the Premiership title. It was the first time since 2005 that Manchester United did not win a major competition.

Without results, the pressure from the fanbase to spend more to bolster the squad intensifies.

When these signings don't pan out, the debt effect snowballs. One only has to look at the dramatic falls of clubs like Leeds United, Crystal Palace and Portsmouth who mortgaged the future for short-term success.

Even big clubs aren't immune. Manchester United's neighbors to the North, perennial Scottish powers Rangers, have gone into administration and today were voted out of the Scottish Premier League. Rangers may have to start all over in the lowest league, the Scottish Third Division.

So it's a case of damned if you do and damned if you don't.

Keep spending money in hopes that you return to championship form and boost club revenues, or do some cost cutting to put the books more in balance, knowing that you'll probably incur the wrath of your fans and possibly lose even more revenue.

As Joshua the computer said at the end of WarGames after playing hundreds of games of Tic-Tac-Toe and global thermonuclear war to a draw, "A strange game. The only winning move is not to play."