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Red Devil in details of Manchester United IPO

ReutersManchester United fans hold up a protest banner in 2010. A portion of the planned IPO will go to paying down debt.

SAN FRANCISCO (MarketWatch) -- For the upcoming Manchester United Ltd. initial public offering, the "Red Devil" is in the details, since what the fabled soccer club has already revealed to prospective investors is strong on brand promises -- but little else.

On Friday, Manchester United (MANU) is set to begin trading on the NYSE Euronext's (NYX) New York Stock Exchange following an offering of 16.7 million Class A shares with a current pricing range of between $16 and $20 a share. Read preview of this week's IPOs.

Half those shares will be issued by the company and the other half will be sold by Red Football LLC, the entity representing Tampa Bay Buccaneers owner Malcolm Glazer and his family.

In 2005, Glazer took over Manchester United after spending two years buying out other owners in a series of debt-backed deals. At the time, the British soccer club -- one of the world's best-recognized sporting franchises, known for its 19 championship wins, celebrity players such as David Beckham, and its "Red Devil" mascot -- was valued around $1.5 billion.

It's that retail recognition, rather than enthusiasm for the stock's promise as an investment, that may provide support for the IPO. And that may not be enough. Much of the buildup to the IPO is making the stock sound more like a piece of sports memorabilia than a sound investment.

Issues of debt and the lopsided dual-class structure are turning many institutional investors off, said Scott Sweet, senior managing partner and principal researcher at IPO Boutique. At best, it's going to be "a challenging offering," he said.

"It's only appeal is going to be to retail investors," said Sweet. "It's almost like having a piece of the Green Bay Packers even though those shares don't trade."

Assuming an $18 IPO price, the company plans to use proceeds of $141 million from 8.3 million issued shares to help pay down debt, which is currently listed as £437 million, or about $684 million, according to the prospectus. That's down from a peak of £773 million, or $1.21 billion, at the end of fiscal 2010. As for the cash from the other 8.3 million shares, that's going into the pockets of the sellers: the Glazer family.

After the smoke clears, new shareholders will hold 42% of Manchester United Class A shares, which, under the dual-class share structure, gives them only 1.3% of total voting power. The Glazers will retain 58% of the Class A shares, and most importantly, all of the Class B shares, which have ten times the voting power of the Class A shares, leaving them with 98.7% of the voting power.

Such lopsided dual-class share structures have been hallmarks of recent IPOs that have left a bad taste in investors mouths, namely, ones like Facebook Inc. (FB) , Groupon Inc. (GRPN) , and Zynga Inc. (ZNGA)

Adding to the red flags, the company in charge of the 134-year-old soccer team will also take advantage of reduced financial reporting requirements for up to five years as an "emerging growth company" under the Jumpstart Our Business Startups Act of 2012, and has no current plans to pay a dividend.

"I feel favors are going to be called in to get [the IPO] done," Sweet said. "On weak IPOs, many players need to dance every dance to get in on the hot IPOs."

Given the brand's global appeal, however, it may very well be the retail investor that drives demand on this IPO.

"Institutional demand will not be great but retail demand may keep this alive," said James Krapfel, IPO analyst at Morningstar. "Given the float is not that big, it won't take that much retail demand to make it quote-unquote successful. Institutional investors are leery of the company."

Morningstar, which models the value of the stock at about $10, said in a note it's concerned about Manchester United's ability to earn excess returns on capital consistently given the unpredictable nature of sports. Also, capital costs to get and retain star players are just going to rise.

One way of keeping up with those costs may lie in the bankability of Manchester United's brand. The team made £103.4 million, or about $162 million, from sponsorship and merchandizing deals in fiscal 2011, compared with total revenue of £331.4 million, or about $518 million.

Last week, Manchester United cut a seven-year, $559 million deal with General Motors Co. (GM) to advertise the Chevrolet brand on their jerseys beginning in 2014, a deal that reportedly led to the ouster of Joel Ewanick, the GM marketing chief who engineered the deal.

In comparison, the current shirt sponsor, Aon Corp. (AON) , who is also among the IPO's underwriters through its Aon Benfield Securities unit, paid $125 million for a four-year deal. Lead underwriters on the deal are Jefferies Group Inc. (JEF) , Credit Suisse (CS) , and J.P. Morgan Chase & Co. (JPM)

That increasing brand value may come into play when Manchester United's 13-year merchandise contract with Nike Inc. (NKE) expires in three years, either through a renegotiation or through a higher bid from another apparel company, Krapfel said. The team made £31.3 million from Nike in guaranteed amounts and split profits for the 2010/2011 season.