Manchester United is one of a handful of publicly traded sports teams. Its current enterprise value is approximately $6 billion, which is the price that investors have recently offered to pay to buy the storied soccer team. So Manchester United must be making a lot of money, right?

Not so much…

Why is an asset with that financial profile worth so much? The answer (and as an Arsenal supporter it pains me to say this) is that there’s only one United.

In finance parlance this is an example of an irreplaceable asset, something that you could never recreate from scratch even if you had unlimited capital. But that begs another question: If Manchester United is an irreplaceable asset, why isn’t it worth more than $6 billion?

Being worth $6 billion already makes ManU one of the 10-most valuable sports teams in the world. And while it is itself irreplaceable, there are similar assets like the Cowboys, Yankees, Lakers, or (ahem) Arsenal. So ManU’s value in the eyes of potential buyers is capped at the point where paying a premium for ManU isn’t worth it relative to what one could pay for a different professional sports team. 

Frustratingly, this number is not a known arbitrage and can be influenced by all kinds of factors: location, history, league, wins and losses etc.

I used to think that buying a sports team was something ultra wealthy people did to demonstrate status and entertain themselves. But since Jerry Jones bought the Dallas Cowboys for $150 million in 1989, he has earned a very respectable 13% annualized return on his investment (for context that’s what Warren Buffett has generated at Berkshire Hathaway over the same period).

But if you’re going to make an investment like that, you have to know full well going into it that you won’t monetize it until the end of your holding period. The reason is that if you’re building an irreplaceable asset, it makes sense to plow all of your earnings back into it to make it more and more irreplaceable (as sports team owners do by signing players, building stadiums, updating their logos, etc.). 

Said differently, if you buy a sports team to make it cash flow, you’ll undermine the value of your own investment because in the course of not spending on players and stadiums you’ll start losing games and fans and end up making the asset replaceable. 

On the other hand, if you have an asset that’s a melting ice cube, like the pager business has been from the 1990s until today, you should absolutely maximize your annual cash flow distributions so you can do something else with the money that asset generates before it disappears.

Of course, these are examples of business types where making decisions about capital allocation are binary and easy. Most of the real world operates somewhere in between.

— By Tim Hanson

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