3 Sep 2012
In The Value Perspective, we often give our reasons as to why we prefer to leave IPOs to other people, and here is yet another case in point…
If a significant proportion of a company’s revenues are driven by factors over which it has little control or visibility, I suspect most people would take that to be a bad thing.
If, on top of that revenue volatility, the business’s cost base is dominated by a relatively small number of powerful suppliers, who tend to have little loyalty to the company in question, then things would go from bad to worse.
To complete the picture, if the company’s operating profit has scarcely been enough to cover the interest payments on its borrowings (banks normally demand an interest bill be at least three times covered by profits) and it has only generated significant free cash flow by selling prize assets and has had to issue equity to pay down debt twice in the last two years. This might sound like an accident waiting to happen.
It would probably not therefore feature at the top of many people’s list of potential investments and yet a stake in this business has just been floated on the New York Stock Exchange at a price that implies a market value for the whole company of $2.3bn. This was of course the sale of 10% of the Glazer family’s holding in Manchester United, which they took private in 2005 in a deal worth approximately £800m.
The original £6.7m floatation of Manchester United took place on the London Stock Exchange in 1991 and it is curious that the recent initial public offering (IPO) did not happen in London, as had initially been planned, or indeed in Singapore, where the club has a significant local fan base.
What the New York float demonstrates is how a suitably motivated army of investment bankers can sell pretty much any company if people are not interested in, or look closely enough at, the underlying elements of that business. Ultimately, the sellers only need to be able to convince buyers to part with their money for perhaps one day – the buyers though may have much longer than this to regret their decision. In this case not even the forces of Wall Street were enough to achieve the valuation the vendors wanted for their shares, but the fact that they still chose to sell them at the lower price is probably instructive.
The floatations of Facebook and Groupon are two other IPO examples that spring immediately to mind, and these and Manchester United again, all serve to underline why, here on The Value Perspective – and as we have continually argued in articles such as Fear of the new – we prefer to leave IPOs to other people.