Buy Manchester United!

One of Britain’s most astute investors has invested heavily in Manchester United. He’s betting on big changes in global sports rights markets. He’s probably right.

If you’ve never heard of Nick Train you might guess that he is a very smiley children’s TV presenter who can carry off a yellow jumper.

He isn’t.

Mr Train is a rather haggard-looking, hard-bitten, long-term investor who reads about businesses and markets for several hours each day. His job is to take £1.2bn of cash and stake large slugs of it on a small number of investments. In a Buffett-like way, he likes to hold investments for a long time, so a lot of thinking goes into each decision. Manchester United is his first investment in 2 years.

Historically, the results have been good for shareholders. Finsbury Growth and Income, the investment trust that Mr Train manages, has increased in value 135% over the last decade and over 300% over the last 20 years. By comparison the FTSE 100 has risen just 11% and 46% over the same periods. Well done, Nick.

Figure 1: Finsbury Income and Growth Share Price
Figure1_Finsbury_Income

Why am I bigging up Mr Train?

Just one reason – last month he invested in Manchester United, now listed on the New York Stock Exchange. Mr Train believes that at some point there will be a fundamental shift upwards in the valuation of Manchester United.

I think he is right.

Having grown up a Leeds United supporter, this is very painful to write but there are at least three reasons why Manchester United looks like a great business to invest in for financial gain.

Manchester United is a very rare asset. It is a truly global brand which attracts a clearly defined, hard-to-reach audience – young men – who spend a lot of money on a particular range of advertising-driven, high-margin products – think beer, shaving products, cars and under-used-but-great-for-walking-to-the-pub-in sports goods. I have had remarkably similar conversations with young men about Manchester United in places ranging from Jakarta to Jeddah, from Cape Town to Changzhou. In each city these young men have struggled to understand why anybody could be stupid enough to support Leeds United (currently 6th in the Championship) when there is a success soaked club packed with global footballing superstars just 50 miles across the Pennines. I have felt the Red Devils’ global power viscerally.

The Devils’ weakness is their relative lack of traction in the US, the largest and most lucrative advertising market, where soccer is a small but growing sport. But this is also a strength since as US media monoliths increasingly seek growth outside their home market, the appeal of rights that hit the new targets and do not simply super-serve existing, domestic customers increases.

A studio from which a never-ending series every bit as engrossing as The Wire or The Sopranos plays out season after season.

The second reason is the volume of the content that Manchester United produces and the relative security of its value. Mr Train quotes James Montague’s ‘The Billionaire’s Club’ which describes Premier League clubs as “entertainment products; a studio from which a never-ending series every bit as engrossing as The Wire or The Sopranos plays out season after season. And the best bit? The network will never cancel it.”

The strength of the Manchester United brand together with rises in rights fees is already driving revenue and EBITDA growth to new heights, as you can see in figure 2. As long as the club achieves the acceptable level to get into Europe, the mix of heritage, mythology and continuing success should keep momentum going as long as the clubs can keep control over the already remarkable levels of player salaries. Alan Sugar memorably described this dynamic as “the prune juice effect” since the money goes in one end and out the other, directly into players’ pockets.

Figure 2: Manchester United Revenues and EBITDA
Figure2_ManU_turnover

And finally, the biggest reason of all. The rights market for brands that produce content with global appeal is almost inevitably going to change fundamentally over the coming years.

In fact, the market is already changing.

The US based, global digital giants have already started to sharpen up their knives and carve off a few rights packages. These giant companies play to different rules from the traditional rights bidder, which is likely to inflate the market significantly.

Amazon has already secured the rights to Thursday night live NFL and outbid Sky to the ATP tennis rights in the UK from 2019. PGA golf rights have been spread across Twitter and GiveMeSport with its 26m Facebook followers as well as more traditional channels. Formula One is creating user generated video packages of content for Snapchat. Facebook is experimenting with Major League Basketball and made a serious bid for Indian cricket rights, only to be outbid by Star, the network majority owned by Murdoch’s 21st Century Fox.

These are just the opening salvos before battle seriously begins.

Amazon has its own, unique business model, bundling great TV into its Prime membership package as it seeks ever greater control over all aspects of the consumer life of its users. Amazon’s spend on TV rights is estimated to be over $4bn (£3bn), but the scale of the company with its near $500 billion valuation and shareholders’ limited expectations of profitability give it the phenomenal investment firepower to make a global rights play if it chooses. The Prime package has had far more success in the US than in markets beyond and Amazon’s multi-faceted business could benefit in many ways from a battalion of new, committed subscribers locked into Amazon’s battery of services.

Netflix already invests around $6bn (£4.5bn) per annum in content, which will rise to $7-8 billion this year. CEO, Reed Hastings says spend will continue to grow significantly as Netflix addresses the vulnerability of its reliance on rights licensed from other media companies. The global view is very important for Netflix. In the year to September 2017, Netflix added 22.6m new subscribers. 5.3m of them were in the US bringing in around $9.2 of revenue per month but 17.2m new subscribers came from the rest of the world, even though the monthly revenue at $7.81 was a little lower. While the markets continue to fund Netflix’s remarkable growth with cash, adding iconic sports rights must surely be in the mix as potential rocket fuel to propel a leap in subscriber numbers.

The billions of dollars these two global rights machines are pouring into original content needs some perspective. The BBC spent £1.67bn across all its television channels (ONE, TWO, FOUR, CBBC and CBeebies) last year, roughly a third of what Netflix will spend on content this year. Sky and BT pay £1.7bn per year for their Premier League rights.

It is early days for Facebook in sports rights but the company is now officially in the market.

Amazon and Netflix could bring new excitement to both the UK and the global rights market but they are certainly not the only players.

Facebook has created the Watch tab on its platform and has hired its own content and rights team. They are already experimenting with Major League Baseball and have already bid, unsuccessfully, for the Indian cricket (see my earlier post about Facebook). It is early days for Facebook in sports rights but the company is now officially in the market.

Will Disney sit on the sidelines? They are is setting up their own sports streaming service in 2018 under the ESPN brand, which initially will not conflict with the ESPN TV service but how long before that balance changes?

Just a quick look at the relative market capitalisations of these companies shows the change of dynamic if – or when – these global, digital players make a fundamental play for major sports rights.

Figure 3: Market Capitalisations
Figure3_Market_Capitalisations

So what will be the impact?

The bidding for the next round of Premier League rights will begin later this year. It will be a fascinating will-they-won’t-they as we wait to see if any of the big digital entrants will compete for these UK rights packages. The packages are already fiercely expensive, but the price could easily escalate further if just one of the global players takes a swing. Citi’s guesstimate is for Sky to pay a further £600m, a 45% increase, to hold onto its packages. One senses that this negotiation is a little early to create the excitement of a truly global rights competition for the Premier League. But if a global player dives in, the price could easily be far higher. My guess is that the leap to global competition will be put off for another 3 years.

Growing rights pressure is an important factor in Fox’s desire to take over Sky. Fox dominated Star was able to fight off Facebook for Indian cricket rights but it was a battle. Increasingly, strategies with global scale, cross-subsidising business models and the accompanying very deep pockets will be key to compete for key rights against the digital titans.

Sky must be delighted that BT is under pressure: Italian scandals, the pressure to upgrade the network to fibre, the struggle to match dividend promises and a ballooning pension deficit make BT a weaker competitor for the critical Premier League rights. But there is a reason why Jeremy Darroch, Sky’s CEO, is so careful to persuade analysts that Sky is a rounded business that goes far beyond sports rights, why Sky Original Productions are emphasised and why the current advertising pushes Sky One so hard. The pressure on key sports rights, which drives over half of Sky’s most subscriber base (the most lucrative part) is mounting and although Darroch proudly points out he has walked away from what he sees as over-priced rights, can Sky really afford not to hold the dominant Premier League rights position?

Wherever digitally-driven global titans need traction, the attraction of a big shove forward from sports rights will be there.

Across the globe, major sports rights will take on a new dynamic. Wherever there is a market that digitally-driven global titans need traction, the attraction of a big shove forward from sports rights will be there. If such rights have anywhere near the impact that they did in driving Sky’s own growth, other titans will follow. Rights will inflate in price in the UK but the most potent rights packages in emerging markets such as India, Indonesia and China will garner far more helium.

As a punter, my concern is the effect on the sports themselves. In the US, sports such as the NFL have changed significantly, becoming organisations designed to create ever more video-focused ‘content’ to attract more rights money. It will require enormous discipline if a similar dynamic isn’t to be replicated across many other sports. Debates such as the one over Sky’s desire for the Arsenal – Liverpool game to take place on Christmas Eve (not great for travelling Liverpudlians) will become more common as the demands of global media become more powerful.

But most importantly of all, what will be the effect on Leeds Utd? Like all clubs, Leeds desperately needs to get back into the Premier League and build on the club’s rich and volatile history. Sadly, the club needs to follow in the footsteps of Manchester United to build its international value.

It will be a long haul. Mr Train made a far better bet on the Devils.

Postscript
A reader asked if I have shares in Mr Train’s investment trust. No, I don’t, though I wish I did. Now the trust trades at a premium to the value of its net assets and people from Yorkshire like me don’t like paying at all, never mind paying over the odds.

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About Tim Ewington

Co-founder of Shortlist Media. Previously co-founder of media strategy consultancy, Human Capital. Still innovating, consulting and investing.
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