Skinny posted a piece regarding possibilities around a share issue or flotation by Mr Green of his company which owns Rangers. It provoked, as usual, some interesting discussion.
A regular commenter, Iain, offered some thoughts from the perspective of the Rangers fan, pointing out that the apparent failure of Sir David Murray’s rights issue in 2004 was nothing of the sort, and it is therefore wrong to take it as an indication of what might happen should the former Sevco Scotland Ltd reach a stock market.
As Iain put it:-
The RIGHTS ISSUE was indeed a 1:1 offer of preference shares to existing shareholders.
(there was an opportunity for any non shareholders who really wanted to buy to do so….with no general prospectus, publicity or finance available it’s no surprise that it wasn’t taken up in any number).
The RIGHTS ISSUE comprised of preference shares issued at a premium to what they were trading at the time. I’m sure our friend Eco will confirm that this is most unusual as preference shares are normally issued at a discount (hence the preference part).
So…not a flotation. Not a general shares issue, but a 1:1 RIGHTS ISSUE, where the offer price was HIGHER than could be bought on the open market, and there was ZERO chance of Sir David’s shareholding being diluted!
And people try to hold this up as evidence of a reticence of Rangers fans in owning their club!
The reality is Sir David knew all along that the uptake would be very low. That’s why he used MIH to underwrite it. That was the plan! Shift Rangers’ debt from them to another part of his empire….and in the process face no risk whatsoever of diluting his ownership.
We know now of course that this was all conceived under the knowledge that his mates in the banks were perfectly happy for MIH’s debt to rise. That’s why he did it!
I was interested in this analysis, as I had not seen it suggested before that the rights issue was in fact simply a device to inflate Sir David’s shareholding whilst transferring debt from Rangers Football Club PLC to the banks supporting the rest of his business empire.
It also seemed to be a suggestion that he had not actually wanted any other investors on the issue as the offer price was above the market price. I am sure Iain does not mean to imply that Sir David, who is now Mr Green’s pal, deliberately sought to take advantage of fans of the football team!
And so, as I had a spare ten minutes, I went looking at Rangers share and rights issues.
The 2000 Rights Issue – Enter Dave King
David Murray, the Club Chairman stated that Rangers is aiming to raise up to £53.1 million in cash, before expenses, through a Rights Issue. My comments are in bold throughout.
The key elements are as follows:
proposed 1 for 3 Rights Issue of up to 15,380,507 new Ordinary Shares at 345 pence per share, to raise up to £53,062,749 million in cash, before expenses.
minority shareholders, many being loyal fans of the Club, have the opportunity to participate in the issue if they so wish.
Murray Sports, which is controlled by David Murray, has committed to take up its rights under the Rights Issue, through its wholly owned subsidiary RFC Investment Holdings, representing an investment of £32.3 million.
Of the £32.3 million, the Murray Group is investing £9.3 million with new investment of approximately £20 million from Ben Nevis Holdings, a company associated with Dave King, a successful Scottish businessman based in South Africa. A further £3 million is being invested by private parties.
This is when Mr King appeared on the scene at Ibrox, of whom was written in my last post.
Dave King is appointed as non-executive director and Douglas Odam as finance director to the Board of Rangers.
Rangers main objectives are to:
continue to improve the quality of the player pool
I wonder how well Rangers fans thought that went after 2000.
develop young players through the new Rangers Academy
Perhaps less successful although present circumstances seem to make playing the young players a necessity and as a result they may bloom into a fantastic crop in years to come, but in the years after 2000, I do not recall too many coming through the ranks to first team success. I am happy to be corrected by those who know better.
improve Rangers’ performance in European competitions where the revenue streams are enjoying significant growth
increase media revenue, potentially through pay-per-view and through the internet
use Rangers’ brand loyalty to develop new revenue streams from internet distribution channels
A fine aim all those years ago when people thought that there was a huge market for pay services on the internet.
as a result of recent significant investment in players, borrowing levels have risen substantially and the Board now wishes to reduce the Club’s reliance on short-term borrowings, as publicly stated at the Club’s AGM in December.
Interim Results for the six months to 31 December 1999 are:
• Turnover for the six months to 31 December increased by almost 40 per cent to £29.8 million (1998 seven months: 21.4 million).
• Trading profit for the period was £112,000 (1998: loss of £3,090,000).
So, to address a comment which popped up on the blog in the last couple of days, in 1999 the turnover and the costs FOR SIX MONTHS ran at almost £30 million each!
Fast Forward to 2004
Again my comments are in bold.
PROPOSED 1 FOR 1 RIGHTS ISSUE OF UP TO 57,276,477 NEW ORDINARY SHARES
Correct Iain – a rights issue.
Rangers announces that it is offering up to 57,276,477 new ordinary shares at 100 pence per share to qualifying shareholders through a Rights Issue. Murray MHL Limited (“MHL”) has undertaken to take up its rights in respect of the 11,785,479 shares held by it and to subscribe or to procure the subscription of further new ordinary shares so that the minimum amount raised by Rangers, after the estimated expenses of the Rights Issue, is GBP50 million. The Prospectus(“Prospectus”) for the Rights Issue is being published today.
BACKGROUND TO AND REASONS FOR THE RIGHTS ISSUE
Over the last few years, the finances of football clubs throughout Europe have been subject to major unexpected changes and pressures. Rangers has been affected by these changes, particularly as they came over a period when Rangers was making significant investment in its playing squad and training facility at Murray Park.
And in connection with which expenditure there had been a £53 million rights issue four years previously…
During the summer of 2002, the board set out to implement a three year plan to stabilise the Club’s finances. Good progress has been made by John McClelland and his team in the implementation of this plan. However, it is clear to the board that this plan alone would not be sufficient to re-establish a sound base for the finances of Rangers. The actions taken under that plan have been necessary to restore a solid financial framework under which the Club can operate on an ongoing basis. However, the Club remains weighed down by a heavy burden of debt and this has been recognised too by our principal shareholders, MHL and Murray Sports Limited.
I wonder if this will explain what happened to the money raised in 2000…
MIH through MHL has agreed to provide the level of support to the Rights Issue which will allow the Club to restructure its financial base. As a result of this increased financial commitment by MIH to the Club, David Murray announced his decision to return as Executive Chairman on 1 September 2004.
Changing financial environment
The board believes that the financing of football clubs, particularly those in Europe, has been affected by two key factors. First, the impact of the Bosman rulings has transferred the negotiating initiative from football clubs to players and their agents. The transfer fees that can be secured by clubs have collapsed for all but a few superstar players. This has also led to increased player wages as funds previously paid between football clubs as transfer fees are now paid directly to the players and their agents.
If a club was a selling club, that would be a problem. But for a buying club however, Bosman was a good deal, allowing them to sign the pick of the players.
Second, media revenues paid to football clubs, which grew considerably during the mid to late nineties, have now substantially diminished. This has particularly affected media related revenues in Scotland.
Impact on Rangers
Against this background, Rangers was committed to the growth of the playing squad in pursuing success in European competition. The changes in the financial environment left Rangers realising lower values on the transfer of key players than had previously been reasonably expected. Players’ wages escalated as the Club sought to encourage and retain competitive footballing talent. Prior to the implementation of the three year plan Rangers’ annual expenditure on football salaries was amongst the highest in Britain.
Oh dear… but it was not one of the highest earners…was that a slight problem?
In addition, media revenues from domestic competitions which the board had reasonably expected to be around GBP10 million annually have fallen to less than GBP2 million annually as a result of reduced media spending.
Someone maybe can educate me – were Scottish clubs, especially Celtic or Rangers ever making £10 million annually from domestic media revenues?
The board believes that the cumulative effect of these adverse factors has been the principal cause of the current financial position of the Club. It is in that context that the board believes the Rights Issue will strengthen the longer term position of Rangers. Although the fund raising will not alter the Club’s basic business strategy, which is to maintain a balanced approach to on and off field activity, it will enable the Club to re-invest operational cash flow which would otherwise have gone to service and repay debt.
A good plan – bring in funds which doe not cost you interest to pay off debt which does cost you interest…
The plan which the board has been implementing contains a number of elements, including:
– bringing together the activities and expenditures of the football operations and the commercial activities directly related to football;
– improving performance in merchandising Rangers products;
– concentrating on internal youth development and the creation of home grown talent at Murray Park to reduce player costs; and
I have heard that one before – in 2000 to be exact.
– providing a competitive playing squad within a sustainable budget.
These initiatives have made a significant contribution already in improving the Club’s financial position.
On 14 September 2004 Rangers announced full year results for the year ended 30 June 2004. Turnover was up by 16.5% from GBP49.0m to GBP57.1m.
The loss on ordinary activities before tax of GBP5.9m is an improvement of GBP23.7m against the prior year loss of GBP29.6m.
Past ambition was financed by large capital investment and the promise of media revenues that did not materialise.
That is not a great strategy then, is it? Fortunately the man in charge in 2004 had no connection with these failed tactics. Hang on…oh.
The Club must now operate within its financial constraints. The board intends, having regard to available financial resources, to field the best available team for each game.
STRUCTURE OF THE RIGHTS ISSUE
Qualifying Shareholders are being given the opportunity to subscribe for one new ordinary share for every existing ordinary share held at a price of 100 pence per new ordinary share.
The Rights Issue structure allows all the minority shareholders in Rangers, predominantly loyal supporters, to participate fully in the issue of the new ordinary shares on an equal basis with MHL and Murray Sports.
Funny how each pitch to the fans mentions how “loyal” they are. And if Iain was correct, then Sir David did not intend his fans to take this on, as they were being sold shares at too high a cost.
THE SUBSCRIPTION PRICE OF 100 PENCE PER NEW ORDINARY SHARE COMPARES WITH THE OFEX MIDDLE MARKET PRICE OF 98.5 PENCE PER EXISTING ORDINARY SHARE, AS SUPPLIED BY THE NEWSTRACK SERVICE OF OFEX, ON 4TH NOVEMBER 2004, THE LATEST PRACTICABLE DATE PRIOR TO THE PUBLICATION OF THE PROSPECTUS. INVESTORS SHOULD THEREFORE BE AWARE THAT THE SUBSCRIPTION PRICE REPRESENTS A PREMIUM OF 1.52 PER CENT. TO THIS MIDDLE MARKET PRICE.
MHL has agreed to take up rights in respect of the 11,785,479 ordinary shares held by it and, in accordance with underwriting arrangements, to subscribe or procure subscribers for further new ordinary shares so that the minimum amount which will be raised by the Club, after the estimated expenses of the Rights Issue, is GBP50 million. If fully subscribed the Rights Issue would raise approximately GBP57.3 million before expenses.
The new ordinary shares will, when fully paid, rank pari passu in all respects with the existing ordinary shares, including the right to receive all dividends and other distributions hereafter declared, made or paid on ordinary shares.
Sadly Iain falls into the error trap of which he accuses others. The rights issue was of ordinary shares, not preference shares.
PROSPECTS FOR RANGERS
The Rights Issue is expected to raise a minimum of GBP50 million for Rangers after the estimated expenses of the Issue. The net funds will be applied to paying down the Club’s debt.
In addition on 4th November 2004 Bank of Scotland entered into a facility agreement with the Club. Under this agreement, additional details of which are set out in the Prospectus, Bank of Scotland has agreed to provide the Club with up to GBP15 million on a revolving credit basis to finance the ongoing working capital requirements of the Club and up to GBP22 million on a fixed term basis to refinance part of the Club’s existing bank debt.
It still seems remarkable that, at the same time as raising £50 million to pay down debt, Rangers at the same time lined up £37 million more debt! I know that the terms might have been better etc, but is this not symptomatic of the excesses of top football teams in the early part of this century? Burning money as if going out of fashion!
The board believes that this restructuring of the finances of the Club will provide the stability required to continue the good progress which has been made during the past two years. The board believes that prospects for the financial position of Rangers will be greatly improved as a result of the Rights Issue and that the Club will be well placed to build on the secure foundations provided through the support of its shareholders and Bank of Scotland.
Sadly it was not to be.
THE EXISTING ORDINARY SHARES AND THE NEW ORDINARY SHARES ARE NOT TO BE LISTED ON ANY STOCK EXCHANGE NOR WILL THEY BE DEALT IN ON THE AIM MARKET. IT IS INTENDED THAT THE NEW ORDINARY SHARES WILL BE ADMITTED TO TRADING THROUGH OFEX BUT THIS SHOULD NOT BE TAKEN AS IMPLYING THAT THERE WILL BE A LIQUID MARKET FOR THE EXISTING ORDINARY SHARES OR THE NEW ORDINARY SHARES. CONSEQUENTLY, IT MAY BE DIFFICULT FOR AN INVESTOR TO SELL OR REALISE EXISTING ORDINARY SHARES OR NEW ORDINARY SHARES. THE VALUE OF THE EXISTING ORDINARY SHARES AND THE NEW ORDINARY SHARES MAY GO DOWN AS WELL AS UP AND THEREFORE ON A SALE INVESTORS MAY REALISE LESS THAN THE ORIGINAL AMOUNT THEY INVESTED.
A very necessary warning – no one could say they were misled!
How Did This One Go?
DAVID MURRAY, the Rangers owner, said last night he is “quietly confident” the club will be debt-free within 12 months, after revealing the outcome of the club’s £57m rights issue.
Some 3390 existing and 1263 new Rangers shareholders subscribed. They invested an average of £248 each, raising additional sums of £848,465 and £307,530 respectively.
Murray admitted that he was “delighted” by the participation in the offer of more than 4500 shareholders and supporters, declaring that it demonstrated “strong support” for the initiative. He added: “Collectively, we have created a firm financial footing for the club.”
The near-doubling of Rangers’ share capital has tightened Murray’s grip on the club. He now controls 99.8m shares, representing a 91.8 per cent stake. The Rangers chairman again underlined his commitment to fiscal prudence by stressing that all the new money will be used to eliminate debt.
Hindsight is always perfect, but surely, even in 2004, someone was questioning Murray’s “Commitment to fiscal prudence”? Was this not the man who boasted about doubling the spending of Celtic?
” It [the new money] is all going to square the books off.”
Murray expects Rangers’ net debt to be cut to £10m-£15m by the end of the financial year next June, down from £74m at the end of 2003-04. Such a figure would be roughly on a par with Old Firm rivals Celtic.
Murray would like to go further, though. “It is still my intention to cut the debt back to nothing. We own our stadium, our training ground and our brand. We are in a very strong position. I am quietly confident that over the next 12 months we can get the club on a position of having no debt.”
That did not quite work, did it?
Eyebrows were raised when it emerged in the rights issue prospectus that Rangers had lined up £37m of borrowing facilities from Bank of Scotland, even as it detailed plans to pay down debt. Most of Rangers’ existing borrowings are with the bank in the form of long-term loan and overdraft facilities. Murray has stressed, however, that the new facility was put in place because the club had to satisfy auditors Grant Thornton that it had sufficient funds for its rights issue business plan under a “worst-case scenario”. That could perhaps involve a swift exit from European competition, or even the unlikely event of failing to qualify for Europe at all.
Commenting on the extent to which Rangers will draw on that new facility, Murray said the club “does not intend to go anywhere near £37m”.
I love that comment – “of course we have no intention of going anywhere near THIRTY SEVEN MILLION POUNDS” OF DEBT! This from the owner of a team which had just been £74 million in debt and had only succeeded in reducing exposure to the bank by having another part of the business, funded by the bank, underwrite the issue, to raise funds to pay off the same bank, being also the one offering the new facilities!
Thanks to Iain for sending me off through the history books.
None of the contemporary information suggests any perception that the rights issue was a device to make Murray’s hold on the company stronger. Indeed at an estimated cost of £700,000 it seems an expensive way of doing so.
Over 5,000 individuals subscribed. Was Murray taking them for dupes?
That would be scurrilous to suggest, and wrong. I am sure therefore that between what Ian has said and what I have read, I have misunderstood him.
“The reality is Sir David knew all along that the uptake would be very low. That’s why he used MIH to underwrite it. That was the plan! Shift Rangers’ debt from them to another part of his empire….and in the process face no risk whatsoever of diluting his ownership.”
And, as I said, this is the man to whom Mr Green is cosying up…the fans of the team he used to own seem to think very negative matters about him.
Maybe Sir David back in the Ibrox Directors’ Box, and just in time for a floatation flotation share issue rights issue Dutch auction scramble ach, call it what you like!
Posted by Paul McConville