My last post discussed the first half of the May 2012 Presentation by Charles Green wherein he sought investment in his vehicle to purchase Rangers.
This post looks at the financial aspects of investment in May. It suggests that the approval of a CVA and continuity of Rangers PLC was necessary to preserve history and tradition. Mr Green clearly changed his mind!
Figures are given for anticipated profits which, frankly, make little sense.
After Part 1 introduced Rangers, Part 2 goes into the real stuff of value to investors – the money!
Page 13 consists of the classic “small print”. It is a long and detailed disclaimer. Amongst the highlights is the statement that the Presentation is in connection with “the proposed placing of new Ordinary Shares in the capital of Sevco 5088 Ltd”. This presentation was doing the rounds at the end of May. What was being sought were investors in Sevco 5088 Ltd. It seems that the comments made previously that the intention always was to have Rangers owned by a Scottish based company might not be 100% correct. If so, why was Mr Green seeking investors in Sevco 5088, a company formed in England. Maybe it would be an interesting question for someone to ask Mr Green? When did the master plan change from having Sevco 5088 buy the assets? Was it instead the lack of immediate investment? If I had put lots of cash into 5088, I would have been less than happy to see the assets being sold to Sevco Scotland Ltd! That therefore suggest that the trawl for investors did not hit gold.
The Presentation was also directed at specific investors, and not the generality. It was targeted at “investment professionals; high net worth companies, associations and persons; certified high net worth individuals; sophisticated investors and self certified sophisticated investors”.
It would be wrong to make any humourous comment about needing to be certified to take part in this offering!
Indeed the disclaimer states that persons of any other description should neither act nor rely upon the Presentation as they would not have the skills to assess risk properly.
The disclaimer also refers to it containing “forward looking statements”. However these may contain “known and unknown risks, uncertainties and other factors” outside the company’s control. Therefore no one is advised to rely upon any of the forward looking statements.
Clearly it should be in breach of the rules to, for example, issue a Presentation for sophisticated investors suggesting that one had found the secret of turning base metal into gold, giving returns of 1,000%. However, with enough disclaimers, and with the Presentation not addressed to the general public, would it in fact be against the rules, as long as the vendor believed he had found the secret of the Philosopher’s Stone?
Page 14 details the “Recent History”.
It stated that Craig Whyte owned 85% of the shares and that 26,000 fans owned the remaining 15% of the shares. Of course Mr Whyte did not own the shares personally – they were owned by Rangers FC Group Ltd. And of the 26,000 fans, one of them was Dave King who, through his corporate vehicle, owned 10% of the shares.
On 9th January 2012 the Presentation states that shares were suspended on the PLUS Market, with a Market Capitalisation of £25 million. I return again to my “Carthago delenda est” theme. In January 2012, with all of the debt loaded on it, the company had a market value of £25 million. The assets of the company, minus the debt, were sold five months later for £5.5 million. In what way was £5.5 million an “adequate consideration” for assets of the value almost five times as high?
On 14th February the Presentation states that the company entered administration “with creditors totalling between £75 million and £135 million depending on the HMRC player test case”.
On 23rd April the Presentation stated that the SFA imposed sanctions of a 12 month transfer embargo and a fine of £160,000.
On 13th May Charles Green agreed exclusivity.
It is note-worthy, I think, that these were the “recent events” outlined by the Presentation What was important was (a) who owned the company (b) its entry into administration (c) the transfer embargo and (d) Mr Green’s exclusivity.
Page 15 detailed the “Current Situation”.
“Rangers FC avoids liquidation via CVA subject to creditor’s (sic) approving £8.5m offer”.
It fails to mention that the “offer” was an offer of a loan, and not a purchase or other direct investment.
- Players contracts remain in place
- Other significant sanctions avoided, such as a 3 year ban from Europe
- History and tradition of the club is maintained”
The reader will notice two of the benefits listed in particular – the players’ contracts and the history. Mr Green’s position of course was that the players TUPE’d over anyway, when the CVA was rejected. If TUPE was automatic, as he seemed to suggest, then how was this different?
As far as the history is concerned, you will note the benefit of the CVA:-
History and tradition of the club is maintained.
Even today Mr Murray, the Chairman, talked, in the context of the IPO, of the 140 year track record of the club, even though the CVA failed. Clearly, after the CVA failed, Mr Green had a Damascene conversion, persuading him that the history could be parcelled up and sold off. In which case, one could ask, why was it emphasised as one of the three main befits of the CVA being accepted?
The Presentation, in detailing the Current Situation, continued:-
- “Personal up front commitments from consortium, £8.5m required to fund CVA
- Raising up to £30m to fund working capital and development
- Funding to be in place by May 24th
- Charles Green draws together first class management team and Board
- Complementary investment team appointed to help direct the Club’s strategic growth”
Now, it does not seem that the £30 million was in place by 24th May, as indeed it is still not in place. What about the “complementary investment team”? How about the “personal up-front commitments”?
Page 16 outlines the Management Structure.
This is of course to be a first class management team and Board. The structure is split into a PLC Board and a Football Club Board.
The cast list for the PLC Board consisted of the following excellent and experienced managers and executives:-
- Chairman – TBA
- CEO – Charles Green
- CFO – TBA
- Non-Exec – Zeus Capital Appointment
- Non-Exec – TBA
On the other hand, whilst that might seem a trifle lacking in the first class skills wanted, surely the FC Board would impress?
- Chair – PLC Board
- CEO – Charles Green
- CFO – PLC Board
- And then five more, all going by the same initials – TBA!
So, apart from Mr Green, and a mysterious Zeus Appointee, the cupboard seemed rather bare.
Page 17 detailed the Current Balance Sheet.
What did the Balance Sheet disclose as assets for purchase by the investors?
The Presentation continued as follows:-
- All creditors to be wiped clear on consideration of £8.5m save for £3m being owed to other football clubs
- Brought forward tax losses of £40m to remain in place subject to HMRC approval
- A Property portfolio of £113,303,174 (source: Rangers plc 2011 accounts)
- Season ticket advances due by the end of 2012 of £15m
- Player book value £8.8m (source: as above)
- On a £30m fund raise a net £20m will be surplus cash on balance sheet
From the financial point of view, and ignoring the moral issues, a successful CVA would have “wiped clear” all the debt. The football debt was being kept however at that stage – whereas legally, on the purchase of the assets, there was no legal or football liability to pay the football debts, until the SFA insisted upon it as a condition for transfer of SFA membership to Sevco Scotland Ltd.
The tax losses could have been worth millions to the company if it had continued, although I find it very hard to believe that HMRC would willingly have allowed tax losses to be carried forward at the same time as being stiffed for almost £100 million! However, I can see no way in which Mr Green can claim that newco “owns” the tax losses – if he did, then yet again the value paid becomes ridiculous.
The property portfolio worth £113,303,174. In May, a couple of weeks before his company bought the assets, he was looking to sell it to investors as having a nine figure value property portfolio. Two weeks later, the whole assets, including the £8.8 million worth of players and the £113 million property, was bought for £5.5 million. Carthago delenda est!
Season ticket sales expected of £15 million – although the phrase “season ticket advances” has worryingly Ticketus-like connotations to it!
Finally, the implication is that £10 million of the £30 million raised would be spent, and the rest “surplus”. By that stage of course the transfer embargo was in place, so immediate player purchases were not the reason for all the cash.
Page 19 told the prospective sophisticated investors about the “Key Operational Changes to be Made by New Management”
These were as follows:-
- Use industry contacts to ensure playing squad is improved
- Enhance shirt advertising contract
- Enhance general advertising contracts
- Improve RFC image and commerciality within Asia and Far East
- Greater financial control and corporate governance
Quite how the contacts were going to improve the playing squad when an embargo was in place baffles me. Otherwise, enhancement of contracts, expansion in the East and better financial controls and governance all sound fine, but without flesh on the bones, where does this take us other than mom’s apple pie land?
Page 20 took us into the Investment Case.
The bullet points for that are as shown below:-
- First Class management team in place with proven track record
- Positive balance sheet with surplus cash
- Predictable revenues and costs
- Underdeveloped IP, especially in Asia
- Potential enhancement to commercial contracts – Replica strips
- Stadium branding
- Potential of cornerstone investors (outside board) to help unlock squad replenishment opportunities
- Broad, quality core shareholder base to build value
- Liquidity in shares to return with Aim listing in Q3 / Q4
- Rangers FC is a trophy asset with tremendous legacy and brand loyalty
- Fans are behind deal structure
- a reinforced sense of belonging
- Favourable odds of European football
Who is this first class management team with a proven record? Is it the massed bands of TBAs, or is this a reference to Mr McCoist and his back room staff?
The old question about the chicken and the egg comes to mind regarding the positive balance sheet and surplus cash. Presumably the investment leads to the positive balance sheet?
Predictable revenues and costs? In Scottish football?
Enhancement of revenues for shirts and advertising?
Stadium branding – would Rangers fans be happy about their team running out at the Easyjet Arena or the Santander Stadium?
Cornerstone investors unlocking squad replenishment opportunities? Is it me or is that just guff and twaddle?
A quality core shareholder base to build value? So where does that out the planned IPO – what advantages do the core shareholders get? (We see that shortly).
AIM listing in Q3/4 – that seems to be going to plan.
Rangers FC is a trophy asset? One suspects that Rangers fans would not be happy with their beloved club being referred to by its saviour as a “trophy asset”. As for legacies and brand loyalties, we are back at the prawn sandwiches again.
Fans behind the deal structure? Not in May. However Mr Green was prescient to see how the fans would turn in support of him.
A reinforced sense of belonging? To what?
Favourable odds of European football? This brings us back to concerns expressed before about behind the scenes discussions and commitments being sought or granted, as was suggested in relation to Bill Miller’s “Incubator”.
Page 22 outlined the “Specific Deal Structure”.
What was the plan?
- New investors invited to participate at a pre new money valuation of £10,000,000 in Sevco 5088 Limited
- Investors will secure an 85% shareholding of Rangers Football Club plc and a waiver of a secured debenture over the club’s property assets
- Remaining 15% shareholders comprising 26,000 shareholders/fans will receive a warrant to subscribe for shares on a pro rata basis with the new holding company.
- Founding investors who put up the first £10,000,000 will receive 10,000,000 additional shares at a value of £1 per share on a pro rata basis effectively doubling their contributions
- Charles Green being incentivised by 10% of the enlarged share capital of the holding company post completion
- Sevco will function as the holding company and Rangers plc will be the operating company going forward
Remember this was the plan for purchase of Rangers PLC. It foresaw the shares all being lost to the original owners. The “individual shareholders” would have the right to subscribe to shares in the holding company.
The share issue was to be in connection with Sevco 5088 Ltd, the holding company.
The “founding investors” would receive 10 million additional shares between them with another 10 million being subscribed for.
Mr Green was to receive incentivisation of 10% of the enlarged share capital – £3 million?
One wonders what the rationale would be about the club/company issue, had this route been followed. Would the investors be offered the chance to buy shares in the club, or rather would these be the holding company which owned the shares in the operating company which owned the club?
Or is it simply the case that Mr Green is adapting his sales pitch to adapt to the prevailing circumstances?
Page 23 discussed the “Alternative Deal Structure”.
It reads as follows:-
“In the very unlikely event a CVA is not agreed by creditors, the holding company will buy the same assets from Rangers plc for £5.5m – Rangers would potentially be precluded from European competition for up to 3 years.
-Advantages to alternative scenario:
- Salaries could be reduced by c. £7m as there would be less requirement to retain star players
- Anticipated pre tax profits of £2m every year for the next 3 years
- Less pressure on working capital”
This of course was the plan which came into operation. The holding company (but not the one originally intended) bought the assets for £5.5 million. Did Mr Green genuinely believe that failure to agree the CVA was a “very unlikely” event? If so, who was advising him?
In the spirit of positivity however, which is not a bad thing when seeking to promote investment in a company, there were still the advantages listed. A £7 million salary reduction? Pre tax profits of £2 million for the next 3 years? Less pressure on working capital?
Based on the brief P&L accounts included, the suggestion of a £7 million wage reduction = £2 million profit per year seems odd. That effectively would mean that, under these plans, the expenditure would drop to around £40 million per annum. However, as we have seen, European football, and lots of it, was needed to keep RFC from heavy losses. Therefore, at least on the figures here, it is hard to see how that calculation could possibly stand up. Equally, if RFC had stayed in the SPL after an asset sale, why would there be less need to retain quality players? Did Mr Green foresee the prospect of being demoted a division? If so,. He should have mentioned it, one thinks.
Page 24 gives the final summary.
A fresh start for Rangers FC
Management to unlock full potential of RFC
Fans onside, supportive and enfranchised
Significant investment upside from clear commercial strategy
In the event CVA is not agreed, alternative plan in place to keep the club running
The interesting question will be just how much of this Presentation will find itself cut and pasted into the new Prospectus. This was based on being an SPL team with the chance of European football, not a team which has still not made it to the top of SFL3, and which has gone out of the Ramsdens Cup.
Will we hear more about splitting the company up into a holding company and a football company? Which one will “own” the club? Will the corporate structure be changed to put title to the £113 million property portfolio into another company in the group?
What will the supporters be getting for their money? Will they be enfranchised where they have no more than 50% of the shares? How likely is it that the fans could work together to wield their shareholdings effectively?
Mr Green might regret that this Presentation became public knowledge, especially should the Prospectus disagree with what is stated here.
I am happy to say that I am ready with my fine-tooth comb to compare and contrast them when the time comes!
Posted by Paul McConville