Economics and the mid-life crisis have much in common: Both dwell on foregone opportunities

C'est la vie; c'est la guerre; c'est la pomme de terre . . . . . . . . . . . . . email: jpalmer at uwo dot ca

. . . . . . . . . . .Richard Posner should be awarded the next Nobel Prize in Economics . . . . . . . . . . . .

Wednesday, December 08, 2004

Corporate Finance and Manchester United Soccer

Malcolm Glazer, owner of the Tampa Bay Buccaneers of the NFL, has apparently been trying to buy Manchester United, of the British Premier soccer league. According to this article in Slate, one reason (from among many) that many Brits oppose his buying the team is that he is trying to use a leveraged buyout to effect the deal; he is trying to increase the debt-equity ratio of the firm/team.

The financial structure of any firm affects both its risk and its rate of return, with both rising as the debt-equity ratio rises. That is, when firms take on more debt, they become more profitable for the stockholders, but they also become riskier.

In most instances, investors see it as a good idea for firms to take on at least some risk, and if Manchester United has little or no debt as of now, then perhaps a leveraged buyout of the team would substantially increase the team's value.

As Slate's writer says, though, increased debt does add to a firm's risk because if there is a downturn in the firm's revenues, interest payments on the debt must still be made:
If revenues don't materialize as expected, teams with debt must sell off assets (players), cut costs (players' salaries), or raise prices (jacked-up tickets)[italics added].
What?? Hold on, there!
How would raising ticket prices help if "revenues don't materialize as expected"? Is the writer saying the demand for tickets is price inelastic? If so, that means the team was pricing tickets such that their marginal revenue was negative! They should raise prices anyway, if they're profit maximizers.

Or is the writer implicitly assuming that the team is a satisficer instead of a maximizer? If this is the case, then the firm is ripe for a takeover, as so lucidly argued nearly 40 years ago by Henry Manne. And if Glazer's attempt to buy the firm is successfully fended off, there will likely be another attempt, soon, by someone else.

I wonder if this argument has already been capitalized into the price of Manchester United's common stock. If capital markets are efficient, it should have been; if they aren't, now might be a good time to buy.
Who Links Here