Financial Analysis of Manchester United Football Club

Key sources of revenues and what are the drivers behind these sources, internal and external factors that influence revenue generation the most

There are three revenue sources of Manchester United; matchday revenues, media revenues, and commercial revenues. (ANON, 2005, http://www.manutd.com/news/fullstory.sps?iNewsid=29754&itype=466&icategoryid=119, p.1.)

Matchday revenues include incomes recieved for successful games in cups and leagues

Media revenues include UK TV deals, live broadcasts.

Manchester United has a wide range of commercial incomes, from sponsorship, to merchadising and financial services. Manchester United operates a TV channel, Radio Statio, Publishes a magazine, provides newletters broadbands, and desktop alerts. Another large chunk of its revenues come from tickets; tickets to games, hotel and cinema. Many mobile phone applications are also provided by MU; alerts, wallpapers, ringtones, ticket alerts, teamshirt orders and games. Manchester United related merchandising include a Megastore, betting, ticket applications, club memberships, eBay auctions, cinema, matchday hospitality, travel services, a soccer school, and broadband. Manchester United has ten official sponsors; Vodafone, Nike, Century Radio, Budweiser, Ladbrokes, Dimension Data, Fuji, Pepsi, Schick, and Audi UK. (ANON, 2005, http://www.manutd.com/sponsors/sponsors.sps?iType=488&icustompageid=880)

Drivers:

There are two measures that we have to observe in relation to the revenues of Manchester United Ltd; the CSF, which is the short form of Critical Success Factors, and KPI, which stand for key performance indicators.

The CSF measure identifies the factors that are neccessery for the company to develop and grow. To further refine our revenue drivers measure, Porter's Five Forces Model will be applied to the corporate Manchester United, referred to as MU in the further sections of the paper.

The five forces model of Michael Porter looks like the following if applied to Mu Ltd.:

SUPPLIER POWER

High diversity of suppliers

Volume is important to supplier

MU differentiates of inputs

Inputs have a highImpact on costs and differentiation

Switching costs of firms in the industry are low

There is a low Presence of substitute inputs

BARRIERS
TO ENTRY
There is quite an easy access to inputs
The is a government policy promoting quite free entry in case certain registration type of requirements are fulfilled.
There is economies of scale
High capital requirements
there are strong brand identity in the succer sector of the sports industry
Switching costs are high
Easy access to distribution
Low expected retaliation

DEGREE OF RIVALRY

-High exit barriers

-Low industry concentration

-High fixed costs/High value added

-Low industry growth

-Low product differences

-Low switching costs

-High brand identity

-High diversity of rivals

THREAT OF SUBSTITUTES

-Low switching costs

-Buyers are not highly inclined to substitute

-Price-performance, to a certain level, has no influence on the preffered team

-trade-off of substitutes

BUYER POWER

Bargaining leverage is neither high, neither low

Buyer volume upon successful times are high

Buyer information can be considered high

Brand identity is strong

Price sensitivity is not extremely high

Product differentiation is very high

Buyer concentration vs. industry is low

Many substitutes are available

Source: http://www.quickmba.com/strategy/porter.shtml

The other, as mentioned before, is the KPI, or key performance indicators. As the Affiliated League Club lists, the KPI of a sports klubs must be the following( p.3, http://nemjfa.homestead.com/BUSINESSPLAN.pdf ):

· Sound business plan

· Stable administration, close communication between all levels of Club Management

· High quality coaches at both senior and underage levels

· High profile and acceptance within the community

· Strong Club presence in schools, both primary and secondary

· Sound oval management, high standard of club facilities

· Sound financial management, expenses kept in line with income base

· Development of Juniors, particularly local based players

Manchester United Ltd. is a very professional company, and is in possession of these characteristics. It actually needs so, if it wants to achieve its declared goal, „to be the most successful teem in football” (http://ir.manutd.com/manutd/about/bustrat/).

As to the last part of the question, identifying internal and external factors, please refer back to the Porter's Five Forces Model above.

Major cost categories of the company, the drivers behind these costs, and the internal and external factors that influence costs the most?

There are three major cost categories, those related to the operation and development of the corporate Manchester United, the costs related to the operation and development of the sporting club, and other, related costs.

The corporate costs include such costs as dept and maintance costs, and costs related to the commercial activities of the company

Examples of club related cost include the compensation of the players and staff, and purchase of new players and stuff.

The other costs include, for instance infrastructural costs, such as the maintance and development cost of the stadium of MU, the „Old Trafford”

The drivers of the costs of Manchester United, and the internal and external factors that influence the cost structure and levels of these cost in all the three major categories can be observed in the second part of question 1, in the Porter's Five Forces Model.

What companies are comparable companies?

Other English football club corporations like Chelsea and Arsenal of London, Everton, and Liverpool. (http://www.manutd.com/home/). Companies operating football clubs are very dinstinct from companies of other industries, and the larger football clubs are probably very similar to each other in how they conduct their business, all having some income sources, tickets, clothing, that are the same.

Multiples appropriate for the comparison of the company with other comparative companies, what financial and non-financial measures should be a basis of comparison

Probably the best multiple to measure the success of a club is the games won to the sum of tied and lost games. This is important, because the more games a club can win, the more the corporate club can achieve in its merchadising, and the more sponsors it will be able to attract. This multiple would be considered to be a non-funancial measure. A financial measure applicable to football corporations would be profitability if the company, as it, though with limmitations, measures how efficiently the club is operating. Another financial measure would be the revenues per players in a complete season.

Method most appropriate to assess the value of the company, advantages and disadvantages of the relative and the DCF methods.

If we are looking at the performance of the company, probably the profitability is the measure that should be used, because it measures the efficientcy of the financial performance of the company.

DCF Method:

Advantages:

As DCF analysis is based on the assumptions of the CAPM, it is an analytically correct valuation method. In contrast to the Comparable Companies analysis, volatile market conditions do not have an impact on the results. DCF therefore is often used as an additional point of reference. Since the discount rate is usually derived from the WACC, the DCF takes account of the relative riskiness of the projected cash flow. Accounting rules do not influence this approach, as valuation is based on projected cash flow. growth period period of stable growth

Shortcomings:

Since the terminal value often represents more than 50% of the entire DCF value it is therefore highly sensitive to the underlying assumptions, especially regarding the growth component in the terminal value and the discount rate. Using historical stock returns when estimating the beta depends heavily on the choice of the index. For volatile companies the beta is very high, resulting in a relatively high discount rate and a low net present value of cash flows. Estimating a “correct” value by applying the DCF approach therefore depends to a large extend on the expertise and industry knowledge of the person doing the valuation.

Moreover, the DCF approach neither considers different management options nor future investment opportunities. It only works if cash flows are subject to little uncertainty and the company is managed by a static management team. It does not capture the “true” value if there are large initial losses, highly volatile earnings or immense initial growth rates.'' (WEITZEL, GELLINGS, BEIMBORN and KÖNIG, 2003, IS Valuation Methods- Insights from Capital Markets Theory and Practice –, p.5-6.)

Relative method:

Advantages:

As the comparable companies method is based on public information, market moods and perceptions are reflected, since it measures the relative and not the intrinsic value. Relative valuation is based upon fewer assumptions and can be conducted faster than DCF valuation.

Shortcomings:

The simplicity of valuation by multiples is its deficiency [Benninga/Sarig 1997, 305]. Since no value determinants are analyzed, it is important to carefully select comparable firms. Also, outside variables like mergers and acquisitions in the respective sector can influence stock prices. Figures often fail to capture intangible assets, like quality of management. Hence, CC based valuation should provide a valuable “sanity check” to assure the validity of a DCF analysis, but it should not be the only valuation method used [Benninga/Sarig 1997, 305].'' (WEITZEL, GELLINGS, BEIMBORN and KÖNIG, 2003, IS Valuation Methods- Insights from Capital Markets Theory and Practice –, p.7-8.)

Limitations of applying the relative and the DCF methods to the evaluation of the company, what can be done to overcome this problem

There are a number of limitations of applying the relative and the DCF methods to the evaluation of the company. For instance, purchasing new players and coaches cost a lot of money; it is not rare that that amount of money reaches one million euros. As it was seen in the above summary of the disadvantages of the DCF method. A possible solution to this problem, though not very humane, the cost of these players and coaches could be depreciated over the time frame of the contract involved, just as it is done in the case of new infrastructural expenditures.

In the case of the Relative method, the problem is that the progression of the team in the national, that is in the Premier League, and in the international cups and championships, were much different both in the near past and will probably be in the future also. This increases the risk of the cyclicality of the business. This cyclicality can be much different in the case of the different corporate clubs, which makes the incomes and thus other results of the companies very difficult to compare.