British soccer team Manchester United (NYSE:MANU) has in recent months been in talks with Nike (NYSE:NKE) over the renewal of their exclusive licensing deal. Nike, however, has been reluctant to accept Manchester United's request for $1 billion over 10 years. Now, Adidas (NASDAQOTH:ADDYY) reportedly has indicated that it would accept such a deal. What does this mean for Manchester United?
Where things stand
Manchester United and Nike are in the final year of a 13-year, £305 million ($510 million) guaranteed aggregate minimum exclusive sponsorship and licensing agreement that covers all retail, merchandising, apparel, and product licensing. The current £23.5 million ($39 million) annual deal ends at the close of the upcoming 2014-2015 Premier League season.
Nike has been worried about overpaying for the licensing deal given the realities of the Premier League. While Manchester United became the winningest team in English football history four years ago and has added another title since then, for a total of 20 titles, the team is coming off its worst finish in 20 years. Manchester United finished seventh out of 20, excluding it from European competition for this season. While it's a slim possibility given the club's resources, if Manchester United were to finish in the bottom three, the team would be relegated to a lower league. This would be devastating to the organization, which would lose nearly all TV revenue and the interest of millions of fans.
Manchester United has arguably underinvested in the squad in the past few years, relying on manager Alex Ferguson's brilliant management and tactics to continue its winning ways rather than continuously bettering the team through player acquisitions. Now, after Ferguson's retirement a little over a year ago, a comparatively weak squad, and a new manager, Manchester United has its work cut out for it.
At the same time, other Premier League clubs are signing licensing deals that are nowhere near the high price tag Manchester United is asking. In January, Arsenal signed a deal with Puma for a reported five years and £150 million ($250 million), or £30 million ($50 million) annually.
As such, Nike on Tuesday announced that it would not renew its contract with Manchester United:
Manchester United is a great club with passionate fans. We are proud to have partnered with them for the last 12 years and will continue to sponsor the club until the end of the 2014-15 season. Any partnership with a club or federation has to be mutually beneficial and the terms that were on offer for a renewed contract did not represent good value for Nike's shareholders. We look forward to a successful final season with the club.
Where things are headed
Given Manchester United's current situation and the increasing amounts of money coming into the league, Nike might be right to exit. The final jerseys for Nike and Manchester United's current deal were released this week and feature both Nike and General Motors' Chevy logo.
If a deal is finalized with Adidas this is the last time we will see a Nike logo on a Manchester United jersey for quite some time. Adidas has struggled to grow in Europe, with revenue on the continent unchanged in the first quarter while Nike's revenue grew 25%. Adidas spends less on sponsorship than Nike overall, but notably has been an official FIFA World Cup sponsor since 1998.
A $1 billion deal with Adidas would give Manchester United a large war chest for the next few years to go after big signings, especially when coupled with GM's £48 million a year shirt sponsorship that starts this season. Manchester United has already signed England left back Luke Shaw from Southampton for £30m. Transfer rumors abound on other deals to strengthen the team's lackluster midfield and defense, with Manchester United reportedly in talks with Juventus over Arturo Vidal, Real Madrid over Angel Di Maria, Borussia Dortmund over Mats Hummels, and Monaco over James Rodriguez.
This saga shows yet again sponsors are willing to pay huge amounts of money for the exposure that the most popular teams in the world provide. While I find the business of soccer fascinating, I still wouldn't touch Manchester United's stock with a 10-foot pole. The Premier League is flooded with seemingly endless money from deep-pocketed owners, which makes competing in the top flight ever-more difficult.
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Dan Dzombak can be found on Twitter @DanDzombak or on his Facebook page, DanDzombak. He has no position in any stocks mentioned. The Motley Fool recommends Nike. The Motley Fool owns shares of Nike. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.