Financial Analysis of Borussia Dortmund vs Manchester United
Executive Summary
This report compares the two stock listed football clubs Borussia Dortmund and Manchester United in terms of their financial performance. Through the anlysis it becomes apparent that Manchester United while being a highly leveraged entity, it is still able to meet its debt payments and offer a higher dividend yield. On the flipside, Borussia Dortmund seems to be placed in a market with stronger growth rates while being the financially smaller but more balanced frim. Because of measures that cannot be taken into account via a ratio analysis we recommend to invest in the German club, Borussia Dortmund.
Background Information
Borussia Dortmund
The core business of the Borussia Dortmund Group is football. The German club which was facing bankruptcy in the early 2000s made a remarkable comeback and is currently being the 2nd most valuable football club in the German Bundesliga. Moreover, it is the only German football club that is listed on a stock exchange. Being regularly under the top 5 in the league, the club profits from the extensive advertising revenues which are distributed according to ranking of the club. The club not only has the second largest fanbase in the league, it also attracts on average the most visitors per game in Europe.
On the 11th of April 2017 the club gained world wide recognition as their bus was hit by three explosive devices while the team was on its way to the Champions League quarter final against AS Monaco.
The Borussia Dortmund GmbH & Co. KGaA fully owns most of the subsidiaries of the group which are: the BVB Stadium-management GmbH, the BVB Merchandising GmbH, the BVB Event and Catering GmbH, the Sports & Bytes GmbH which are together a fully consolidated tax group. Additionally, they own 100% of the BVB Asia Pacific Pte. Ltd. And besttravel Dortmund GmbH. Moreover, they are partially invested in the Orthomed GmbH (33.33%).
Manchester United
The Manchester United PLC is the holding of the currently most valuable football club on the planet. Their group is currently worth around 3.69 billion US dollars and revenues of around 764 million USD. With 214 million in annual sponsorships, Manchester United ranks third on the list after Barcelona and Real Madrid (both in the Spanish Primera Division) of having the most lucrative sponsors. The PLC which as the parent company, fully owns the rest of the club is listed on the NYSE and incorporate don the Cayman Islands. The only majority stakeholder in the PLC is the Glazer family, which is among the richest owners of a football club in the world.
Recently there have been rumours about several former players of the club preparing an offer to buy out the Glazer family. With the help of Chinese Institutional Investors they plan to take over control of the club.
Industry Trends
The European football market grew by 13 percent to an accumulated market size of 24.6 billion Euros. The biggest 5 leagues, among the English premier league and the German Bundesliga ranked as first and second make up for more than 50% of the market. In terms total revenues from each league, the premier league makes with nearly 5 billion almost twice as much as the German Bundesliga which ir ranked 2nd with 2,7 billion Euros. This is especially because of the very generous broadcasting contracts the league has signed. Compared two the broadcasting revenues of nearly 1 billion Euros, the premier league has more than 2.5 times as much. In terms of projected growth, we expect both leagues to perform well throughout the financial year. By the end of this season, the Bundesliga is expected to take the 3 billion hurdle. Likewise, and even though growth rates are slowing (most likely due to the exchange rate) it is projected that the premier league will hit the 5 billion in total club revenue by the midst of summer 2018. For Manchester United, their wage cost makes up roughly half of their revenue and is with 247 million pounds the highest in the premier league. Nonetheless the premier league is the most attractive league in the world, the costs are offset by the tremendous investors and sponsors, who push a lot of capital into the market. As one of the biggest clubs, Manchester United is profiting a lot from the growth of the league. However, since growth in revenue is slowing down, the club has to be careful that the costs do not continue to increase unproportionable.
For Borussia Dortmund, the situation is slightly different. In the past the industry numbers in the german football system have been doubling. In terms of real value added the professional football system has been outperforming the German economy by factor ten. This made the industry become very relevant on a federal level since it accounts for 2.3 billion in tax and social insurance revenue. The very steady growth is forecasted to remain at least for another few years. Estimated potential for revenue growth will be around 35%. As Borussia Dortmund is one of the top 3 clubs in the German league, equipped with one of the youngest teams, the biggest stadium and enough capital. There is a high chance that the Group will benefit over proportionally from the implied growth.
Additionally, both clubs will participate in the Champions league which is another stream of additional value added. The champions league has been grown in the digital space only by about 12 percent in the past campaign. This market is very attractive, as throughout the campaign a total amount of more than 1 billion euros will be distributed among the participants. Those will be receiving money for both, being successful within the campaign by winning games and moving forward into the next round and by attracting more viewers. Around 500 million Euros will be distributed according to the proportional value the club provides to the campaign. It is beneficial for a club to play in a bigger league and to have a large and international customer/ fan base and as you will capture more value while attending the champions league. Both is given for Manchester United and Borussia Dortmund.
Ratio Analysis
In order to evaluate the financial performance of both companies, we compare Borussia Dortmund to Manchester United in terms of profitability, operating efficiency, liquidity and financial risk.
Profitability & Operating Efficiency Analysis
The return on assets (ROA) for Borussia Dortmund (9.33%) is slightly higher than for Manchester United (ROA of 6.12%), which indicates that Borussia Dortmund has done a better job in turning its investments into profits. As both companies are getting taxed differently, EBIT has been used to show relative success of operating decisions.
Both companies provide as similar return on equity invested to their shareholders. NPAT has been used to show what percentage of the profits is available for distribution (Borussia Dortmund 10.31% and Manchester United 10.09%).
Since the ROE measures are very close to each other, Gross profit with EBIT being used as Profit has been calculated in order to understand whether there is a difference in performance with regards to generating sales. Manchester United (15.97%) has a significantly higher profit margin, suggesting that of every dollar in revenue, they were able to capture roughly 6 cents more in profit than Borussia Dortmund.
To summarize from a shareholder perspective both companies deliver a very similar return on shareholder Equity while Borussia Dortmund is using its assets more efficiently and Manchester United makes more profit out of every dollar in revenue.
In order to understand the reasons behind this observation, the Dupont method helped us identifying differences in what is driving the ROE of both football clubs. As the DuPont Analysis includes the ROA and both measures are used to understand how companies manage shareholder capital, we calculated the following:
As a result, the calculated ROE is higher. The higher profit margin indicates and confirms that Manchester United has a higher operating efficiency. On the flipside Asset turnover confirms that Borussia Dortmund is using its Assets more efficiently. The key difference here is clearly the high equity multiplier which indicates Manchester United has a higher level of leverage since it used more debt than equity in order to finance their assets. As the balance sheet of Manchester United indicates a number of Total Liabilities which is more than ten times higher than the Total Liabilities of Borussia Dortmund, the high Equity multiplier is not surprising. For the Investment opportunity, this result means ROE for Manchester United might be slightly higher, but the significantly higher leverage offsets the gain side. Nonetheless, as the English football club is the largest football club on the planet and they managed to keep their ROA at 10% the additional cost of debt might be lower than suggested. Additionally Leverage can offset losses in income tax which could explain why their profitability is higher (even though ROE has been calculated with NPAT)
Liquidity & Working Capital Analysis
In order to see, which effect the high leverage has on its daily operation we measured how long it takes the company to turn its working capital into revenue. The days working capital ratio suggested that it would take Borussia Dortmund 54.43 days to turn its working capital into revenue. Manchester United however has a negative working capital ratio implying that ??? (leverage is so high that they don’t make profit at all?)))
Since the football business is only requiring a marginal set of inventories for its merchandise which is just one of many revenue drivers only indication whether Manchester United could pay off its debt if it would need to is by evaluating the current ratio in order to see how many assets could be turned into cash in order to pay off debt quickly. Usually a 2 to 1 ratio is considered being in a healthy financial situation while less than one is implying that a company cannot pay its debt without seeking additional sources off financing. Borussia Dortmund has ratio of 1.71 while Manchester United has a current ratio of 0.94.
Capital structure & leverage Analysis
In order to evaluate whether the high leverage is feasible regardless of the low current ratio and the negative day working capital, the debt to asset and debt to equity ratio have been calculated. While Borussia Dortmund has relatively low ratios (debt to asset 0.27 & debt to Equity 0.37), Manchester United has naturally higher ratios. Their debt to equity ratio of 2.17 suggest a very strong preference for a debt to equity mix which is strongly skewed towards debt financing. Given their circumstances, the relatively low debt to asset ratio of 0.68 might partially explain the strong preference for debt financing as (even though not current) the ratio rightfully suggests a strong assets base which is verified by a number of total assets equal to nearly two billion in the balance sheet.
With the relatively strong assets base the question of whether Manchester United is able to service its debtholders. Assuming that a ratio above 3 is regarded as being healthy, Manchester United with its ratio of 3.52 seems to be able to pay back its creditors. What is striking is here the high ratio of Borussia Dortmund of 16.99 suggesting that the German club is missing the opportunity to leverage on projects that could generate additional income. The additionally calculated cash cover ratios for Borussia Dortmund (15.83) and Manchester United (7.96) support the hypothesis that the high leverage of Manchester United is not necessarily a problem.
Per share ratio Analysis
As the Earning per share ratio is quite high for Borussia Dortmund (23.78) and Manchester United (51.36), the dividend yield gives us more insight in how much cash flow one can expect. As the dividend yield of Borussia Dortmund is 0.7 % while Manchester United appears to have a 1.1 % yield, a higher dividend yield can be a sign of lower growth potential. This hypothesis would go hand in hand with the suggestion that Manchester United’s Cash flows are more stable which therefore suggest a higher leverage.
Recommendation
Since Manchester United is the bigger company with a stringer assets base in the better financed Environment the high leverage is not so much the problem but can be seen as an motivation to invest as the company is saving a substantial amount of tax. In the end it is about whether we believe that potential capital gains via growth from either of the two companies can outperform the aforementioned dividend yields. As there is still a lot of growth potential in the German Bundesliga and since Borussia Dortmund is the second largest club in the league, I align my recommendation with the aforementioned findings from reports who suggest a growth potential for the entire league of 30%. Larger clubs will profit from such growth rates extra proportionally because their relative gain is much larger than the one from the smaller clubs. As the English Premier League just signed a Broadcast contract and this additional revenue is already priced into the stock price of Manchester United, their relative growth opportunity is smaller. Additionally, football clubs are highly dependent on their game performance, as amount of merchandise sales, value of their players (current assets), revenues from sponsors as well as value of the stadium (decreases when it is not being used on full capacity as it wont generate the same amount of money), one of the most important questions to ask is whether Manchester United’s success is midway sustainable? There is the debt to asset and debt to equity ratio that addresses the level of risk, but only to the extent which the number can cover it through the tangibles. If we have a look into the premier league, it becomes apparent that the competition is much stronger. Since 5 to 6 teams operate on a similar financial and professional level. In Germany are the chances that you make it into the top three much higher which is why when taking into consideration the predicted growth rates my recommendation is to invest money into Borussia Dortmund.