Is Now The Time To Short Manchester United Shares?

Odey Asset Management, the hedge fund founded by city hotshot, Crispin Odey – the man who bet big on shorting banks right before the financial crisis hit – is at it again, this time with Manchester United. Odey has taken out a short sell position on Manchester United Ltd, (MANU) shares. What is short selling? The car example.

Short selling is essentially placing a bet that a company’s share price will fall. It basically involves borrowing stock.

Let me use the car borrowing example to explain this:

Let’s say I believe that, due to over-supply from factories in Asia, Toyota Yaris – a car that normally retails at approximately £12,000 – will fall in value. So, you ‘borrow’ your friend's brand new Toyota Yaris for a period of one month and sell it on to Mr Hanks from Manchester for £12,000. If your prediction proves correct and prices fall, you then buy back a brand new Toyota Yaris for £10,000 and give it back to your friend: making a £2,000 profit in the process. This is the principal of short selling share prices.

Odey and Tremblant both short Man Utd shares

Odey Asset Management took out a short 0.78% position earlier this month, which is roughly $22m. In addition to Odey’s short sell position, hedge fund Tremblant also has a 0.81% short position.

So what does all this short selling mean?

In truth, this doesn’t actually mean a huge amount; unless you pay attention to reputations.

The scale of short interest has actually been slowly declining since the start of the year, while the share price has rallied from $13.33 to $16.97. The percentage of short interest of shares floated is currently at 7.9%: well below when that measure peaked above 10% earlier this year. There are 1.32m shares currently being shorted, compared to 3.14m a year ago.

However, the above stats stand from 29th November so, inevitably, this may now be bigger given the move by Odey and Tremblant.

Odeys’ reputation sways opinion

Crispin Odey is one of the best known fund managers in London. He foresaw that banks were hugely over valued and over leveraged in debt in the run up to the financial crisis and took large short sell positions in banks such as Bradford and Bingley. He then reversed all his short positions in April 2009, right after the bottom of the market was found. He was named the ‘Business Big Shot’ in 2008 by The Times newspaper.

So, this is why Odey shorting Manchester United stock has become big news – because of Odey’s previous form in selecting short positions.

Is now the time to short Manchester United?

Manchester United remains light-years ahead of the majority of its rivals in terms of its commercial success but the gap has narrowed in the last few years.

For their fiscal first quarter, the club reported a 29.1% jump in total revenues, with record first quarter revenues of £98.5m. Commercial revenues increased by 39.3% to £59.9m, while broadcasting revenues also increased by 40.9%.

The club expects to report revenues between £420m and £430m for the full year, with EBITDA between £128m and £133m. However, crucially, the above is on the basis that the team finishes third in the Premier League and reaches the quarter finals of the UEFA Champions League and domestic cups.

The club currently lies ninth in the premier league, a full 13pts behind leaders Arsenal, in what has been the club’s worst start to a season in 12 years. In Europe the picture is somewhat different, with the club easing to the top of their group in the Champions League and now facing less tricky potential ties in the second round.

When Sir Alex Ferguson retired, Man Utd shareholders got nervous – and for good reason: success on the football field is inextricably linked to success off the field. Their disastrous start is a significant threat to meeting their full-year guidance.

And what’s more, this could also impact the speed of the clubs commercial success in the long term if the poor start to the season is a precursor to a shift of footballing power away from Manchester United.

Over the first quarter, Man Utd signed new sponsorship deals with firms such as Aeroflot and Bulova, MBNA and Pepsi: increasing sponsorship revenues by 62.6% to £45.2m. The attractiveness of sponsoring Manchester United is down to their long-term success on the football field and the star players they have at the club.

The Death Cross Chart

There is a warning sign of potential impending weakness in Man Utd share prices given the infamous Death Cross appeared towards the end of October.

The Death Cross is when the 50 daily moving average crosses beneath the 200 daily moving average, signalling a bearish shift in the share price trend. Since the Death Cross appeared, shares had hit a low of $15.50 before bouncing back.

Shares are currently stuck in a consolidation pattern (sideways trend). A break below $16.40 would be concerning and potentially could open up a revisit of the recent lows between $15.16 and $15.50. A break below the psychologically important $15 level would be a big concern.

So, while there’s perhaps enough uncertainty in the near term to give rationality to short positions, there remains a long way to go before short positions can be fully validated.

5 threats to Manchester United
There are five visible and current threats to Manchester United, which may well prove Odey right in shorting the stock.

1. Lack of football success
It remains early days but most bookmakers have Manchester United at long odds to retain the Premier League title. Indeed, they’re also 16/1 or ninth best to win the Champions League – behind Manchester City, PSG and Chelsea.

Moreover, the success of Arsenal, Chelsea, Man City and Liverpool is posing a significant threat to the clubs ability to qualify for next season’s Champions League. Failure to qualify for Europe’s biggest competition would hit the club extremely hard in terms of broadcasting revenues. Early estimates for the cost of missing out on Champions League football currently reside around the £50m mark.

2. Lack of star-player acquisition
It was no secret the difficulties David Moyes had in attracting star players to join the club over the summer, despite rumours of Ronaldo or even Gareth Bale potentially close to joining. Marouane Fellaini was the club’s only major player acquisition and it was completed on deadline day. And, what’s more, there remain doubts as to whether Wayne Rooney will stay at the club past this season given the short time remaining on his contract.

3. Commercial success slowdown
The above two factors will likely weigh heavily on the club’s ability to maintain its current pace of commercial growth. There have also been some fears that the sheer volume of the club’s sponsorship and commercial deals may impact the long-term value of the Manchester United brand itself.

4. Debt
Threats one through four, above, will all likely have an impact on Manchester United’s debt situation. It currently costs the club approximately £70m each year to service its huge debt which, according to its Q1 filing, currently stands at £361m. The Glazer’s have been rumoured to be preparing a February 2014 rights issue to raise as much as £250m to help cut some of this debt, yet they’ve played this down for now.

5. Timing
Investors buy stocks on their future prospects, not historical dominance. The window of opportunity for Manchester United today is vastly different than that of five or even ten years ago. At the very point where TV broadcasting revenues are spiking higher to record levels, the club faces increased competition on the football field by clubs who can now invest either similar or greater levels than they can: particularly considering its debt levels. So, while the pot has just got bigger, the competition has also increased. Manchester United no longer has a free run of dominance. Moreover, rival clubs’ commercial arms are also starting to narrow the gap.

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