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).
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.