Manchester United may be one of the most supported sports teams in the world but that doesn't mean the soccer club is going to find many investors with an appetite for its planned initial public offering in the United States.
Fund managers who have looked at its preliminary prospectus have been either negative or lukewarm on the prospect of buying shares in the club, which is controlled by the Florida-based Glazer family.
They say Manchester United faces significant financial risks given its 423 million pounds of debt ($658 million), and the very structure of the business puts its customers, the fans, at odds with shareholders.
Some are concerned that the U.S. stock market hasn't had many sports team listings, let alone any European soccer clubs, so there isn't much to compare Manchester United against
"With a sports franchise, it's a constant tug of war between player salaries cost and the rest of the operation," said Wallace Weitz, president and portfolio manager at Weitz Funds in Omaha, Nebraska, which holds stakes in Liberty Media Corp , Walt Disney Corp and Comcast Corp.
Manchester United declined to comment and representatives for the Glazers could not be immediately reached.
Like many sports franchises, the team's success on the pitch is largely contingent on its ability to spend cash on players - through both transfer fees and high wages.
While there have been some signs in the past year that transfer spending by top English clubs is being reined in, the pressure on a leading club like Manchester United to spend heavily in an attempt to stay a top team remains. That spending can eat up profits rapidly and lead to volatile financial results.
At the same time, if a club like Manchester United cuts costs and doesn't go into the market for expensive new players, the value of its brand can be at risk. That may not happen to a top club overnight - with just one weak season - but over a few years the value of everything from TV rights to sales of club merchandise can be hit.
Manchester United had a weak season by its own standards in 2011-12, failing to win any silverware, though it missed out on the English title by a hair's breadth.
"The deal is a strong vanity play in terms of being part of a winning franchise but whether or not that mystique around the team translates to money for shareholders I doubt it," said Jeff Sica, president and chief investment officer of Sica Wealth Management in Morristown, New Jersey, which manages over $1 billion in assets. "The chances of shareholders making money on this is very little."
To be sure, many investors will not make a final decision until they know how many shares the company will sell and at what price. The timing of the IPO is also unclear.
But doing a valuation analysis will not be easy even when the price is known because of the lack of comparable public companies in the U.S. The media, sports and entertainment group Madison Square Garden Co owns the New York Knicks basketball team and Rangers ice hockey team, media and entertainment company Liberty Media owns the Atlanta Braves baseball team and cable giant Comcast Corp owns the Philadelphia Flyers ice hockey team, but none are pure sports plays as they own many other assets.
"There's just not a lot of data out there," said Mark Donovan, a portfolio manager with Boston-based Robeco Investment Management which owns shares of Disney and Comcast. "Sports franchises have been the playgrounds of rich entrepreneurs who want a big expensive toy to play with but I don't really know if they pass the test for return on investment."
Teams that have listed in the U.S. in the past also haven't performed well for investors. The Boston Celtics, which were publicly traded for 16 years beginning in 1986, posted three straight years of losses before swinging to a profit in 2002. Shares were thinly traded and held primarily by individual investors, not institutions.
The Cleveland Indians went public in 1998 at $15 before seeing shares tank to $5.38 within four months.
Both teams have since been taken private.
And unlike these teams, Manchester United doesn't play in the United States - other than for occasional exhibition games in the summer months. It may have a sizable armchair fan base in the United States who watch English games on TV but that isn't comparable to the almost religious nature of the support in the U.K.
One particular problem is that some of the legendary English club's millions of fans around the world have shown a rabid dislike for the Glazers, who acquired the 134-year-old team in 2005 through a leveraged buyout. Whether through sizable demonstrations at games or comments on fan websites, they have slammed the Florida-based Glazers for loading the club up with large amounts of debt.
Another red flag is that medium-sized investment bank Jefferies Group Inc got picked to be lead underwriter on the offering only after Morgan Stanley bowed out due to concerns over the team's proposed valuation, according to sources familiar with the matter. Morgan Stanley had been set to participate in the underwriting earlier this year, when the Glazer family sought to list the team in Singapore, raising $1 billion. That plan was initially slated for 2011 but got pushed back due to market conditions.
The team also toyed with the idea of listing in Hong Kong, Reuters previously reported, but investors in the U.S. are largely seen as more accepting of the dual share structure that the Glazers wanted for the offering - a structure that allows them to retain almost complete control even after selling a large stake.
Jefferies and Morgan Stanley declined comment.
There are still a number of big banks helping to underwrite the deal, including JPMorgan Chase & Co. and Credit Suisse AG.
One concern among investors is that the team's cash balance - which it dips into to attract top players - stood at just 26 million pounds as of March 2012, down from 151 million pounds last June. The lack of plans for a dividend is another.
Its revenue rose 6 percent to 245.8 million pounds in the nine months ended in March, while its after-tax profit climbed to 38.2 million pounds from 13.3 million pounds in the year-earlier period.
However, despite the improved figures there are signs of strain. Its net finance costs in the latest nine-month period were 35 million pounds, swallowing up more than two thirds of its operating profit of 50.7 million pounds. Much of its net profit was due to a 22.5 million pounds tax credit, which is unlikely to be sustainable in the long run.
The revenue from the sale of TV rights to its games, which comprised roughly a third of Manchester United's overall revenue in 2011, is based on contracts with the Premier League and Champions League, and are at least partially based on its players' success on the field.
Its match day revenue, meanwhile, is generated from the number of games Manchester United plays. This fluctuates based on how far the team progress in domestic cup competitions and in the knock-out stages of the Champions' League, the top competition for European clubs.
Even its most reliable revenue segment, commercial, which includes sponsorship, merchandise and apparel, could take a hit if the team has a poor season.
"Five years from now, Manchester United could fall on hard times and their attendance could drop and concessions could go down," said John Kim, a portfolio manager with Sentry Investments in Toronto, Canada which owns shares of Disney. "Generally speaking, there is a reason why most sports franchises are private."
The Glazers will keep an iron grip on the team through the dual-share structure which investors fear will give them little say in the club's affairs.
"A dual class structure is definitely a red flag," said Mohannad Aama, senior portfolio manager at Beam Capital Management in New York. "You don't know if the family really knows what they're doing or is someone doing this as a hobby."