Thank the JOBS Act for the Ugliest IPO of the Year

In a rare display of congressional bipartisanship, the Jumpstart Our Business Startups Act became law earlier in 2012. Among other things, the legislation eased regulations so that so-called "emerging" or "high-growth" companies had fewer barriers to going public.

Next week, fabled English soccer club Manchester United will be taking advantage of the JOBS Act's relaxed rules by listing its shares on the New York Stock Exchange. It's seeking to raise roughly $300 million in an IPO (ticker symbol: MANU).

Was Manchester United the sort of IPO that the JOBS Act authors had in mind when dreaming of job-creation and jumpstarting startups (if that's even possible)? I sincerely hope not.

The face of the JOBS Act, summer 2012 edition
The JOBS Act is undoubtedly making it easier for Manchester United to go public. But the soccer club is hardly a "high-growth company."

Paul Hodgson of GMI wrote that "listing a soccer team on a U.S. stock exchange ... is a bit like listing a ski resort on a stock exchange in the Caribbean. ... It doesn't make intuitive sense unless there are regulatory (or lack thereof) reasons for doing so."

Manchester United's owners explored listing shares in Asia and Europe, but, according to Dealbook, "The United States, which has long been criticized for its harsh rules surrounding I.P.O.'s, is now the place where foreign companies go to avoid regulation."

The architects of the JOBS Act would argue that these relaxed accounting standards will lead to innovation, growth, and jobs. We'll wait to see if that's true in the long term. But Man U makes for a troubled start.

The jobless JOBS Act
After the bill passed in April, The Wall Street Journal reported on the obvious unintended consequence of the new law: many shell companies that benefit from the JOBS Act will not actually create any new U.S. jobs. Manchester United is not such a blank-check company, but it illustrates the same problem: It does substantially all of its business in England, and its corporate headquarters, effective April 30 of this year, is now in the Cayman Islands.

Even if the club were hypothetically based in America, its decision to offer shares would not create much in the way of U.S. employment. I simply don't see a scenario wherein this public offering creates a single job in America. Here's why:

An "emerging growth" public offering that doesn't invest in its own growth
Going public should allow a company to raise money that it can then reinvest in its business -- to enter new business lines, build more plants, test more ideas, and, yes, hire more workers.

Instead, Manchester United is hoping to raise about $150 million in public funds to pay down its massive debt load, accumulated mostly from the owners' 525 million pound leveraged buyout of the team in 2005, and partly from player fees. The other $150 million raised in the public offering will go to the owners.

As the company prominently spells it out in the risks section of its F-1 filing, "Our indebtedness could adversely affect our financial health and competitive position."

The 134-year old soccer club saw its operating profits grow just 2.5% so far this fiscal year, after declining 1.6% in 2011.

Does that sound like an emerging growth company?

Convoluted corporate structure
One of our core tenets at The Motley Fool is that shareholders are part owners of businesses. Yet some companies want all the benefits -- massive paydays and liquidity, to name two -- of being public, while effectively remaining a privately held company.

Per Dealbook, Manchester United has proposed "a corporate structure that would give the Glazers [the team's owners] shares with 10 votes apiece. Public investors would receive one vote for each share."

Here is the company's ownership structure, as represented in its F-1 SEC filing:

Public shareholders, if you think you'll have any say in the decisions of the enterprise, disabuse yourself of that thought right now. Bloomberg reported that the U.S.-based owners (the Glazer family, who also own the NFL's Tampa Bay Buccaneers) will "maintain almost 99% voting power over the club after the offering, in which a 10% stake of the company is being sold."

They're able to do this because of the American penchant for dual-class share structures. Here's Dealbook again:

[The Glazers] passed over the Hong Kong Stock Exchange because it would not give the team a waiver to allow two classes of shares, with different voting rights. The London Stock Exchange also does not allow such share structures, perhaps the reason this natural home was skipped over. .... The Singapore Exchange seemed more amenable to the Glazers' plan to list Manchester United and keep control through a dual-class structure. But after the exchange delayed final signoff on the dual-class shares and the Asian markets cooled, the Singapore plans were derailed, according to an article in Reuters.

And thus the United States, with loosening regulatory standards and legal cover for dual-class ownership structures, "won" the share listing.

A bad investment idea
JOBS Act complaints aside, this looks like a terrible investment idea in itself, and I'll be backing up my bearish stance with a CAPScall once the stock is trading. Get this: Perhaps trying to play the part of an emerging-growth company, Manchester United will go public at 50 times earnings and five times sales, according to Bloomberg estimates.

Also dubious is how it accounts for its frequently mentioned "global community of 659 million followers," which makes its fan base roughly 10% of the entire global population. Getting there involves what Dealbreaker calls the "strategic use of vague happy-feeling metrics." From the SEC filing:

We define the term "followers" as those individuals who answered survey questions, unprompted, with the answer that Manchester United was either their favorite football team in the world or a football team that they enjoyed following.

There's still plenty to chew on in the filing, and Wired wrote a smart piece calling Man U a "media company," not a soccer club -- although why a media company should warrant a 50-times-earnings multiple is a head-scratcher.

Maybe if the IPO were taking place in Singapore, enthusiastic team supporters would want a piece of the club, no matter the price. But as Reuters reported, Man U could be a tough sell in the States because there aren't any easy comparisons, and because "many Americans don't regard soccer as a top sport."

A final plea
If there are investors out there who think Man U is worth a look, remember this anecdote from Jason Zweig's book, Your Money & Your Brain:

During the years when shares in the Boston Celtics basketball team were publicly traded, they barely budged on news about important business factors like the construction of a new arena -- but went jumping way up or down based on whether the team won or lost the previous evening's basketball game. At least in the short run, the stock price of the Celtics was not determined by such fundamental factors as revenues or net earnings. Instead, it was driven by the things that sports fans care about -- like last night's score.

That is, again, likely why the owners originally looked to list in Asia, where there's a huge fan base of United supporters to optimistically move the stock price out of step with underlying business fundamentals.

I’ll be watching this IPO closely when it debuts next week, but I won’t be putting my own money near it. If "emerging growth" IPOs like Man U become the rule rather than the exception, the only fitting investors in this dog would be the JOBS Act authors themselves.

Brian Richards is managing editor of Fool.com and once played third-string goalie on his middle school soccer team. Follow Brian on Twitter: @brianlrichards. The Motley Fool has a disclosure policy.


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  • Report this Comment On August 03, 2012, at 5:43 PM, jc09058 wrote:

    Ah... our friends in Congress needing "Good News" headlines during an election year have once again shown us they are not capable of thinking things through in their rush to show us they are doing their "best" for this country.

    ManU is not my team to follow in soccer, nor would it be one to invest in considering what I call questionable acts and motives by the pre-IPO owners. Entertainment companies, like ManU, just aren't stable enough to give me any comfort at all.

  • Report this Comment On August 03, 2012, at 6:01 PM, Pat4Ra wrote:

    First Tech Bubble, then housing/financial bubble and now this what shall we call it - an investment bubble? The congress is brainless.

  • Report this Comment On August 03, 2012, at 6:26 PM, ivanczar wrote:

    No law written by man can be perfect and a good C.P.A. or lawyer will always find the written in or perceived loop hole.Maybe Manchester United will move to America or start a farm team in the USA . NOT!!!

  • Report this Comment On August 03, 2012, at 6:42 PM, Snertie wrote:

    When will they ever figure out that job creation is inversely proportional to jobs-bill creation? The more tweaked and convoluted the tax code, the worse and less fair the whole system gets. What is killing growth now is instability and unpredictability regularly imposed by government at all level. Until they stand down, the current stagnant state of affairs is the new normal. Get used to it.

  • Report this Comment On August 03, 2012, at 6:51 PM, xetn wrote:

    All good reasons why government should stay out of business and eliminate all regulations. The market will do a much better job of "policing" bad actors by voting with their currency.

    Price does a great job of moderating supply and demand without any oversight by anyone.

  • Report this Comment On August 03, 2012, at 7:04 PM, polock46 wrote:

    IN THE INTEREST OFGENERATING AMERICAN JOBS THE PRESENT ADMINISTRATION HAS ALLOWED GENERAL MOTOR ("GOV'T MOTORS") TO PURCHASE NAMING RIGHTS/ADVERTIZING OF THE TEAM THAT WILL GENERATE UP TO 600 MILLIOM IN REVENUE FOR THE TEAM.

    great way to stimulate our economy.

  • Report this Comment On August 03, 2012, at 7:38 PM, TMFRhino wrote:

    Nice thoughtful article, Brian.

  • Report this Comment On August 03, 2012, at 7:46 PM, Fred4953 wrote:

    M-U is hardly a "start-up" operation. So why can't the US Gov't write a law that excludes such obvious misfits????

    The answer: The US gov't hardly EVER writes a law. These are written by specialists trained to squeeze the most $$$ benefit for the bill sponsors, of course...

  • Report this Comment On August 03, 2012, at 9:04 PM, Draytonbird wrote:

    Please, please, everyone remember that we here - I am English and was brought up outside Manchester - HATE the rip-off Glazers.

    They have already raped the club comprehensively since acquiring it; there been huge protests from Man U fans.

    I imagine most would line up and happily pay for a public hanging.

  • Report this Comment On August 03, 2012, at 9:23 PM, dondysert wrote:

    This is what happens when big government gets involved in free enterprise, they will muck it up everytime.

  • Report this Comment On August 03, 2012, at 9:54 PM, chris293 wrote:

    Bread and circuses and more bread and circuses is another way to keep people dumb, fat, and I was going to say happy, but I believe really keep people from doing their homework on what is happening with your's and my tax money. It is a great country and we need to keep that way with of couse baseball, or football?

    Why is the government involved in this? Regulations gutted again by Congress for some strange reason or cause. However in the spirit of capitalism if people want to invest in this, who knows it might pay off or they might lose all their money.

  • Report this Comment On August 03, 2012, at 11:57 PM, EquityBull wrote:

    Good article.

    I won't be investing in ManU. I would take a look at it for buying some PUTS post IPO and ride the wave down. There is nothing good about this team going public especially with the dual class structure by the owners.

    If you want to buy one share to hang on your wall and show your friends than consider that share a novelty that is about it.

  • Report this Comment On August 04, 2012, at 1:45 AM, jomueller1 wrote:

    Please do me a favor: Stop bullying the rest of the world by calling football "soccer". Or is this term just a sign of "American superiority"?

  • Report this Comment On August 04, 2012, at 4:17 AM, OzyKingofKings wrote:

    "I’ll be watching this IPO closely when it debuts next week, but I won’t be putting my own money near it."

    If a stock is that bad, why not short it or buy puts? Or do you mean that the price fluctuations based on the team's performance in games would make even that riskier than normal?

    @jomueller1, it has little to do with American superiority and everything to do with dialect. You wouldn't be accusing the author of bullying if he wrote an article saying Ford was issuing a recall of 2012 vehicles because of a faulty "trunk" mechanism. Or that a hotel company's shares plummeted after an "elevator" accident. The US dialect word for football is soccer.

    Also, if you think use of the word soccer does constitute bullying, it really isn't a very effective form of it as I don't know a single country outside of the US that has adopted the term. Willingly or otherwise.

  • Report this Comment On August 04, 2012, at 4:33 AM, Charbroil121 wrote:

    A company decides to list its shares in the US because of weak regulations here and over a quarter of commentators decide to...complain about excessive government regulation?

    I'm no fan of government regulation of free enterprise, but the kneejerk Libertarianism of some on the right is getting absurd.

    Also, for the guy who was complaining about the word "soccer:"

    "The word soccer is a colloquial abbreviation of association (from assoc.)...An early usage can be found in an English 1892 periodical. The word is sometimes credited to Charles Wreford Brown, an Oxford University student..."

    http://en.wikipedia.org/wiki/Names_for_association_football

  • Report this Comment On August 04, 2012, at 4:48 AM, Charbroil121 wrote:

    Also, @OzyKingofKings, at least according to Wikipedia, there are quite a few nations that have willingly decided to adopt the word soccer (or, I suppose, been successfully bullied by the US*):

    http://en.wikipedia.org/wiki/File:Soccer_football.png

    * This is irony.

  • Report this Comment On August 04, 2012, at 7:42 AM, ETFsRule wrote:

    I don't see the problem. If you don't like the stock, don't buy it. Or short it.

    Giving people more access to investment options isn't a bad thing.

    "The 134-year old soccer club saw its operating profits grow just 2.5% so far this fiscal year, after declining 1.6% in 2011.

    Does that sound like an emerging growth company?"

    Revenues were up 15.7% y/y for 2011, and "commercial revenue" was up 33.7%. So actually, yes it does.

  • Report this Comment On August 04, 2012, at 9:21 AM, dcurrie23 wrote:

    Really? It is easy to point a figure out the potential for abuse, even before evaluating how the market will treat them, and forget how broken our system is - MCI, Enron, Lehman, Bear Stearns, Madoff, rigging the LIBOR, the list could go on.

    Seems like the commentators complain about all government regulation (making it impossible to turn a profit), the other half complain that the government should regulate more (prevent Man U from listing).

    In fact the JOBS act will make it possible for smaller businesses to access capital in the marketplace. This is good. Government protections that have been built up over years of lobbying by vested interests make issuing stock prohibitively expensive today. IPO winners are always the underwriters (the "money changers" in the temple of Mammon as I call them).

    Crowdfunding will allow unaccredited investors to make investments in businesses of their choice - up to a limit of $2,000. Businesses raising money through crowdfunding will be subject to disclosure requirements that will reveal minority ownership rights and the financial condition of the issuer. Surely, Fools understand that it is up to the individual investor to do his due diligence and research and up to the market to determine the worth of the investment. Or maybe Fools are all about leaving it up to the "experts", like the ones who gave us the FaceBook IPO debacle. Or rely on the industry hype that continues to tell us that there is nothing like the return on investment stocks can provide (those 8%, 10%, 12% returns are compounded rates of return).

    Between 1871 and 2010, the annual rate of return generated by the S&P listed stocks was 2.6% (two point six percent). (This can be achieved with very little risk in the municipal bond market.) Or, maybe we should believe the professional mutual managers who typically can't outperform the indexed funds.

    Personally, I think it is high time investors had the right to make their own decisions, invest in companies that are familiar to them, where they may even shop or know the principals, might share some the same values, and where the investment actually stimulates the local economy rather than line the "money changers" and managers pockets, provide jobs in far away places, and possible returns to faceless owners dispersed around the world.

    As a Liverpool fan, I wouldn't consider investing in Man U. if it promised me the moon. As an investor, I wouldn't bail out the owners and would demand voting rights. There are plenty of reasons to pass on this stock and I trust other investors will find this offering unappealing too. I recognize that there will be plenty of fools (small "f") who will invest at their own peril. Perhaps, many of the same who invested in Facebook?

    I am proud of a government that is acting to tear down the regulations protecting the very institutions that are compromising the notion of market based capitalism with arcane rules about who can and can't issue and invest in stock. It is time that the system allow the application of capital to the production of goods and services locally and put it in the hands of the true "job creators: - the small businesses operated by local entrepreneurs that form the backbone of our nation.

    This is what crowdfunding will do.

  • Report this Comment On August 04, 2012, at 10:56 AM, JacksonInVA wrote:

    Another fine example of the incompetence of US politicians.

  • Report this Comment On August 04, 2012, at 12:01 PM, pooh118 wrote:

    Anybody want to buy some Green Bay Packer Stock?

  • Report this Comment On August 04, 2012, at 5:34 PM, Mega wrote:

    There were plenty of overpriced IPOs with poor corporate governance in the decades before the JOBS Act was passed. What exactly is the article blaming it for?

  • Report this Comment On August 05, 2012, at 2:49 AM, EvanBuck wrote:

    Great article, Brian. Manchester United's IPO is most likely going to head the way of Facebook.

  • Report this Comment On August 05, 2012, at 9:58 AM, anuvaka wrote:

    Another example of inappropiate legislation having unexpected results.

    We should be ashamed of ourselves.

    Manchester is just trying to get out of debt, even make some money for the parent corporation. There are few sports franchises that make money. They exist as an advertising stage.

    jC

  • Report this Comment On August 05, 2012, at 10:59 PM, TMFBlacknGold wrote:

    Brian,

    Isn't it safe to say that most of the shell-companies that will benefit (IPO-wise) from the JOBS Act won't be highly publicized? That doesn't make it right at all, but hopefully most thoughtful investors won't get caught owning one of these shams.

    BlacknGold

  • Report this Comment On August 06, 2012, at 10:29 AM, TMFBrich wrote:

    @BlacknGold,

    I don't think we can yet say "most" of the JOBS Act IPO beneficiaries will be SPACs or shell companies. We can say "some" ... or, rather, "more than there should be."

    The WSJ's piece I mentioned above gives some actual numbers (although these are a little outdated now): http://online.wsj.com/article/SB1000142405270230350640457744....

    Fool on,

    Brian

  • Report this Comment On August 10, 2012, at 11:36 AM, Tbird98 wrote:

    omg. I can only see many greedy sport team owners lining up to line their pcokets even further with fans valuable $$$ using this gambit. To sell essentially "useless" shares of a team for people to say "I'm a part owner of (insert team)...". Useless because these shareholders will never have any real decision making leverage or given enough shres to make a difference from the primary owners. I can see noted local NFL owner and skinflint Mikey Brown of the Cincinnati Bengals who has raped the ticket buying public of our area for years with a shoddy product which he called competitive. He will be grinning ear to ear and smiling all the way to the bank on this one.

    We all KNOW how much the USA really cares about professional soccer. Not a whole lot. It places very poorly behind: NFL, MLB, NBA, NHL, NASCAR, UFL, WWF, college football, college basketball,...then maybe professional soccer in USA minds. But I would not place it above minor league baseball. On my list it would rank of interest between bowling and badmitton

  • Report this Comment On August 10, 2012, at 11:43 AM, EvanBuck wrote:

    GRRRRR I've lost 100 points on the CAPS game so far on this pick...dumb post-IPO bounce. Oh well, long term ManU absolutely isn't going anywhere.

  • Report this Comment On August 10, 2012, at 1:10 PM, sonrisa1 wrote:

    Farce book was a rip off & now this is even worse just a way for the Detested Glaziers to steal a bit from ignorant & stupid investors, do not waste your Dollars on this Sham!!

  • Report this Comment On August 10, 2012, at 5:40 PM, EvanBuck wrote:

    Phew, that 100-point drop was only temporary for a few minutes. :)

  • Report this Comment On August 19, 2012, at 4:38 PM, thidmark wrote:

    Please do me a favor: Stop bullying the rest of the world by calling badminton "badmitton". Or is this term just a sign of "American superiority"?

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