Manchester United’s Struggles Pose Financial Risk

Manchester United, one of the world’s top sports brands, may face a double challenge to its financial outlook: poor results on the field and rising wage pressure off it.

The team must overturn a 2-0 deficit against Olympiacos to stay in this year’s Champions League, and it’s 11 points adrift of a top-four Premier League place that would bring qualification for the elite European tournament next season. Wage costs are rising, with England striker Wayne Rooney signing a reported 85 million-pound ($142 million) contract.

Three-time European Cup-winner United, owned by the Florida-based Glazer family, may now miss out on a spot in soccer’s top club competition for the first time in 19 years, hurting the team’s commercial income and share price.

“There’s potentially upwards of 100 million pounds at stake,” Simon Chadwick, a professor of sports business strategy at the U.K.’s Coventry University, said in e-mailed comments. “Obviously, this is all premised on winning the Champions League, but even a modest run in the competition could generate 50 million pounds or more.”

Last year United exited the competition in the round of 16 and earned around 30 million pounds in direct revenue from UEFA, European soccer’s governing body. Clubs make additional money from ticket sales, merchandise and the associated sponsorship value given by the tournament’s global exposure.

The team could go out at the same stage this year after the loss to Olympiacos in Greece two days ago. The second leg is at Old Trafford on March 19.

Rooney Deal

Concern about Champions League participation could be a financial burden in other ways. Rooney boosted his salary to 300,000 pounds a week from 250,000 pounds when he agreed on a new contract Feb. 21, according to the Guardian. The deal runs until 2019, when he’ll be 33.

“Maybe they’re having to pay him more because they’re not looking like they’re going to be in the Champions League next year,” Carsten Thode, a consultant who worked at United prior to the Glazers’ 2005 takeover, said by phone. “Truly world-class players are adamant they should be playing in the Champions League. Maybe United’s not the automatic choice it was last year.”

Salary costs also concern equity analyst Joseph Hovorka of Raymond James & Associates. He cited an “uptick in player wages” as one of his reasons for downgrading United’s rating to “market perform” from “market outperform” on Feb. 14. That means the stock is expected to deliver about the same return as the S&P 500 over the next year.

Player Wages

Staff costs rose 17 percent to 51.6 million pounds in the second fiscal quarter to Dec. 31, compared with the year-earlier period, “primarily due to the impact of player acquisitions and renegotiated player contracts,” the club said earlier this month. United’s Executive Vice Chairman Ed Woodward promised higher than average player acquisition in a bid to reverse the poor form.

Defending league champion United’s stumble this season comes after David Moyes took over as coach following Alex Ferguson’s 26-year tenure. As well as having eight league losses, it exited the F.A. Cup in the third round and the League Cup in the semifinal.

The share price has been slipping even as the club posted record sales of 122.9 million pounds in the second quarter, including a 39 percent rise in sponsorship income. New York-listed Manchester United Plc has fallen about 15 percent since early December.

IPO Price

The shares were little changed at $14.98 at noon in New York today. They started trading in August 2012 after an initial public offering that priced them at $14 each.

Sixth in the domestic standings with 11 games remaining, United could qualify for UEFA’s second-tier Europa League, which brings in much less revenue than the Champions League. Still, Cologne, Germany-based sports marketing researcher Repucom says missing the top competition “will be by no means catastrophic.”

“Due to its high brand value as one of the world’s most followed clubs, merchandise, licensing and revenues via digital formats for example would not be affected,” Andrew Walsh, global director of enterprise services at Repucom, said by e-mail.

United told Bloomberg News it won’t comment on next year’s financial outlook until its annual results in September. Its fiscal year ends June 30.

‘Global Exposure’

United is the third most valuable sports team brand, according to Forbes magazine, and its uninterrupted appearance in the Champions League, combined with what the club says is a global reach of 659 million followers, gives it powerful commercial opportunities.

“They’ve capitalized on the global exposure of the Champions League,” Nigel Currie, of London-based sports and entertainment marketing agency brandRapport, said by phone. “It’s a pretty important shop window for them.”

Sponsorship income contributed 29 million pounds in the second quarter. The “scalpel not a spade approach,” as Woodward describes it, has seen the club slice its rights into smaller categories and geographies, and assemble a sponsorship roster of more than 35 partners.

It’s a strategy that could backfire, said Thode, who now works as head of consulting at London-based sponsorship agency Synergy.

Three Finals

“That kind of aggressive approach has been amazing at generating deals,” he said. “When it comes to the end of the contract and they’re asked if they want to sign up for another four years, that will be even more difficult if the club isn’t in the Champions League.”

Even before this campaign’s domestic dip, United has struggled to keep company with Europe’s best.

The season before last, guided by Ferguson, the team failed to make it out of the Champions League group stage. That in itself was a big turnaround: in the previous four campaigns United got to three finals, winning one.

Winning the tournament this year would guarantee United entry next season, regardless of its domestic finish. It’s an unlikely scenario, with United now 40-1 with U.K. bookmaker Ladbrokes Plc. Still, it could be the club’s only chance of playing among Europe’s elite next year.

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