After reading Goldstein’s blog on this site, I thought the article focused far too much on the Whyte angle. Is Whyte pulling the strings or not? In my opinion what and why things are happening matters more than who is pulling the strings.
Firstly, I was amazed at the success of the Rangers share issue. The club claimed to have raised £22.2m. That is a hell of a lot of money for several reasons – the main one being it was a terrible investment. I can understand supporters being willing to make a financial investment to match their emotional investment … and it’s always nice to have a framed share certificate to display at home. Professional investors are another matter. In the article linked above, Rangers manager Ally McCoist says “The fact that it’s in the region of £22m, and for the fans to chip in with roughly £5m, I think is absolutely staggering”. From that quote we can see that institutional investors were responsible for around £17m raised in the issue.
In footballer terms £17m may be about the equivalent of Gareth Bale’s shinpad. But in terms of an investment in a football club, it’s enormous. Football clubs are a notorious money pit, and the wise investor stays well back. So why would they fling £17m of their investors’ money into a notoriously bad area for returns?
The second thing about the issue that amazed me was the valuation, it was massively overpriced. From the share prospectus here we can see that roughly 42% of the shares in the club were put on sale at 70p a share. This gives a total market capitalisation for the club of over £50m.
To put that into perspective, Celtic have a current market capitalisation of £51m. Just think of that for a second! A club that was in the lowest tier of Scottish football at the time is worth the same as the team that looks to win the SPL unchallenged for the near future and therefore have a comparatively easy path into the lucrative Champions League group stages. In financial terms Rangers and Celtic are in entirely different leagues at the moment.
Rangers have a huge fan base and potentially can reach the same level as Celtic are at now, but they have still a long road back before that happens, so why should the market capitalisations be the same?
A realistic valuation would have been around £30m. This would give the shares room to grow in value as the team moves up the leagues and reflect the income disparity between the two teams at the moment. A valuation of that amount would allow the investors to watch their shares grow in value and provide a nice return on investment. Instead the shares were priced too high and quickly halved in value before recovering to around 45p, which gives a market capitalisation of £31m today. This means the £17m institutional investment is now worth roughly £12m.
7% is known as the golden number for investors in the shares market. A 7% return on investment is a solid return after inflation is taken into account. It is the baseline that investors look at when considering an investment. What professional investor could look at Rangers and say this will bring me an annual return of 7%, either by the share price rising or through dividends? The share price was at the maximum already, and the club is cash strapped so there is zero chance of a dividend payment. So why would normally competent financial professionals invest at all?
Were they conned? This is possible, but after the Ticketus fiasco a couple of years back you can guarantee that every word was treble checked by several lawyers in any agreement. Fool me once shame on you, fool me twice shame on me!
If we work on the presumption that it wasn’t a con and the investors were given a cast iron guarantee, then what was it? The only thing that the club owns that has value is property. Ibrox, Murray Park and the Albion car park, which was bought outright by the money from the issue, are the three assets that initially look to be saleable.
On closer inspection though Ibrox is a listed building in a low rate property area, and Murray Park is built on the green belt with little chance of getting rezoned, so the actual value is extremely limited. Basically, Ibrox is only useful as a football stadium, and Murray Park is only useful for a sports facility.
This is where I dip into conjecture. I’m pretty sure everything I’ve written before is easily verifiable, and I’ve tried to link to proof where possible. Some figures may be out a little, but that’s what happens when you scrawl on the back of a fag packet at 9am on a Sunday morning.
NOTE BY PAUL – Allybhoy sent this piece to me yesterday (Sunday) – it is my fault it has not appeared till today.
As I see it, the only way that corporate investors would be guaranteed any return on investment would be by taking control of the assets and leasing them back to the club. Ibrox itself may be unsellable and not able to be repurposed, but it is of value to a football club with around 50,000 supporters.
I probably should have mentioned earlier, there was another thing that troubled me with the share issue. It was that the shares were sold in Rangers International Football Club, the company that owns Rangers Football Club, as opposed to investing in the club itself. So the £22m investment went into one company and was spent by its subsidiary. What I’m guessing what may have happened is that the holding company has financed the club with a loan of £22m using the clubs assets as security. If the club misses a payment then the ownership of the assets reverts to Rangers International and is then leased back to Rangers Football Club at a set amount every year. The rent money would then be used to give the investors their guaranteed return. In this case it would be advantageous for the investors if the club were to default quickly. This would probably lead to “Admin 2” for the club, which would probably force a move by Jim McColl or Paul Murray to take over and try to keep the club operating.
Another similar way the leaseback could be worked is if Rangers International bought Rangers Football Club’s assets with the £22m investment and are now leasing the club the facilities. We should know when the audited accounts are released. Either way the outcome would be the same. The valuable assets would be owned by the investors in Rangers International, which would then lease them to the new owners of Rangers Football Club. This would put Rangers at a financial disadvantage for quite a long term, but would ensure that the investors don’t get scalped. That’s what people who give you £17m of their clients’ money expect to happen.
This would leave Rangers Football Club asset-less and worth very little. All that would be left to do for Charles Green and Imran Ahmad would be to dispose of the shares they hold in the club to any stooges they could find to invest in a company without its main assets.
I mentioned earlier that the final paragraphs are complete guess work, but it is the only way I can see how financial professionals could have considered the investment in the first place. 7% is the golden number, but investors in a company with no credit history and very little in the way of assets would be looking for a higher return. £4m a year rent for 10 years would double the initial investment while leaving the assets intact for a sell back. That’s the kind of return that I’d be looking for in that situation anyway.
Posted by Allybhoy