Saturday, September 23, 2006

City's Finances (Part One)

Colin Savage is one of the group pushing the Supporter's Trust formation forward. He also publishes articles in MCIVTA's newsletter. At the moment he is writing a series of articles about the club's finances. With the kind permission of Colin and MCIVTA (thank you Heidi) the first part of his informative series is published here, fans and shareholders will not only find this article of great interest but may also learn something they did not previously know.

This is the first of a promised series of articles in the lead up to the publication of the annual report and general meeting. In it, I have attempted to clarify the share-holding position, the structure of the club and who does what on the board.

1. The Club's Shares, Ownership and Management

Manchester City is a "publicly quoted" company. This doesn't mean that we're always in the press but that our shares are traded on a recognised stock exchange and can be easily bought and sold. The market involved is called Plus (formerly Ofex) and specialises in smaller to medium size companies. Their website can be found at The Manchester City page can be found at: Other sporting members of Plus are Arsenal, Glasgow Rangers and Northampton Saints Rugby Club.

Anyone can buy the shares, through a stockbroker, and being a shareholder entitles you to
attend the Annual General Meeting, vote on various matters and question the directors. The AGM is a statutory requirement and is usually held in December, following the publication of the annual report and accounts in October. In the past, with the various boardroom upheavals, these have been lively affairs but have been quieter recently. However, the handling of last year's meeting led to some dissatisfaction and, with increased focus on the finances following the sale of SWP, things could start warming up again!

The more shares anyone has then the more they have the capacity to influence events. On the basis of "one share, one vote" then anyone who owns over 50% of the shares controls the company. In the case of our friends in Salford, the Glazer family (bless them) own virtually all the shares and have made their company "private". This means they do not have to issue accounts publicly or hold an AGM. Therefore their supporters don't have a clue. Sorry, that should read …don't have a clue about the financial affairs of the company.

We know who the major Manchester City shareholders are as there is a requirement for public companies to declare any shareholding of 3% and over and these are detailed in the annual report. There are just over 54 million City shares in circulation and the current share price is quoted as 28p. This is what is known as a "mid-price" as the price for buying a share is higher than the price for selling. So currently you can buy shares at 29p each but would only get 27p each if you sold them immediately. The difference is the stockbrokers' profit margin. There is no minimum investment but many brokers will levy a flat dealing charge up to a certain level. So the fewer you buy, the greater the average cost per share.

The share price is a reflection of the financial worth of a company and its perceived prospects. Multiplying the number of shares by the mid-price gives what is known as the market value of the company. Therefore, in theory, MCFC is valued at just over £15m. Compare that to Aston Villa, which has just been sold for about £64m (but there are reasons for the higher valuation). MCFC has over 5,000 shareholders but there are four who matter.

The largest group of shares are held between John Wardle, the Chairman, and his former business partner in JD Sports, David Makin. Some are held in John Wardle's own name and some are held jointly between him and David Makin but the overall holding totals 29.95%. The significance of this level of holding is that anyone who owns 30% of a company's shares is obliged to make an offer to buy the shares of the other shareholders. Therefore unless they plan a full takeover of MCFC then Messrs Wardle and Makin will keep their maximum shareholding at this level. Although they don't own over 50% they clearly have a large say in events at Manchester City.

The next largest shareholder is the Boler family. The late Stephen Boler built up a substantial stake in MCFC some years ago and this currently represents 18.75% of the shares. Sadly, he died in 1998 but his family's interest was represented on the board by Ashley Lewis for a number of years. He stood down last year but Stephen Boler's son, Mark, joined the board earlier this year. Stephen Boler was a friend of Peter Swales and was believed to be very upset about the way Swales was treated at the time of the Francis Lee takeover.

The third largest shareholder is BSkyB, with 9.88%. Sky has held shares in a number of clubs and was blocked from a takeover of Manchester United a few years ago. It is unclear what their motive is in owning shares in football clubs although it may have something to do with being able to influence negotiations on TV rights. They bought their stake when we were running away with the First Division in 1999 and paid £7.5m for it. It is currently worth around £1.5m so they are sitting on a big loss.

The last of the big four is Francis Lee, who of course endured a turbulent period as chairman after an acrimonious battle with Peter Swales. He still owns around 7% of the shares and, like the others, is probably sitting on a big loss currently. Lee is not on the board and it is unclear whether he is just hanging on to his shares until the price increases further or whether he has other plans. However, if the share price carries on towards 50p it will be interesting to see what all the four groups do.

Between them, these four own around two-thirds of the total shares. This leaves one third of the shares in the hands of around 5,000, smaller shareholders. There are many people, like me, that have a few hundred shares and about 300 of us turned up to the last AGM.

Many companies pay a dividend on their shares. This is expressed in pence per share and is a share of the profits given to the investors (i.e. the shareholders). It is akin to interest on your savings except that it might be nothing or could be a very good percentage in any given year. This, as well as the fact that shares can increase in value, is the reason that stocks and shares have become a popular and standard form of investment. MCFC shares have not paid a dividend for many years because the financial performance of the company has meant there is insufficient cash to fund this. Even a dividend of a penny per share would cost us over £500k and just imagine what SP could do with that!

However it is interesting to note that the share price has been rising steadily and has doubled over the last 12 months. There is no obvious reason for this but it may reflect a feeling that the finances are improving, there is a potential investor waiting in the wings or simply a view in the markets that, in view of the takeovers of Manchester United and Aston Villa among others, football club shares could be a worthwhile investment again. They still have some way to go to reach their highest price over the last five years, which is just over 50p. There are a number of clubs where groups of supporters known as Supporters Trusts, own some or all of the shares in their club and there was an article on this in MCIVTA 1251. If we (the supporters) could somehow combine these small holdings into a more significant bloc (say of 10% or more) then we could wield far more clout than we do now.

The club is run by a Board of Directors, who have a number of legal responsibilities (such as preparing accounts). The board at MCFC, in common with many other companies has a Chairman and a Chief Executive, plus a number of other directors. In our case there are three more directors and this is on the low side as other clubs can have seven or eight.
Directors can either be "Executive" or "Non-executive". The former are full-time employees of the company and are paid a salary. Typically, there would be a chief executive and a finance director, and maybe some others (Marketing, Sales, Operations, etc.). Non-executives are not full-time employees, although they are usually paid a fee and expenses. Their role is to guide the executive directors and also act as a check and balance, to ensure that the executives act in the best interests of the shareholders. They may well be executive directors of other companies.

The question is often asked "What do these people do for Manchester City?" The chairman has overall responsibility for setting the direction of the club and, as I have already detailed, our chairman is also the major shareholder. The chief executive has overall responsibility for running the business side of things and most, if not all of you will already know that our chief executive is Alistair Mackintosh. He is a chartered accountant who was originally our finance director. He is not a major shareholder (although he has a few thousand shares) but he is the only executive director. It is only relatively recently that full-time, paid directors were allowed at football clubs. Martin Edwards and Doug Ellis were among the first to take advantage of this change.

The other directors are Brian Bodek, Dennis Tueart and Mark Boler. All of these, as well as John Wardle, are non-executive. Bodek is an executive director of a couple of other companies and is a qualified solicitor.

Tueart needs no introduction as he was one of our finest players of the last 30 years but he has also built up a very successful sports promotion business. At the last AGM, it was stated that Brian Bodek provides valuable (and free) legal advice to the club and Tueart has responsibility for playing affairs. Neither Tueart nor Bodek are significant shareholders although, like Mackintosh, they have a few thousand shares. Mark Boler represents the interests of the Boler family. They have a near 20% stake in the company and it is usual for anyone with this level of shareholding to have a seat on the board if they want one. In that way they can keep a close eye on their investment. It is generally believed that Brian Bodek performs this role for BSkyB.
Therefore not all of the directors are major shareholders. Bernard Halford, as Company Secretary, will also attend Board meetings.

At the beginning I said that MCFC was a publicly quoted company. In fact MCFC consists of a number of companies. The most important of these (and the one in which the shares are publicly traded) is Manchester City PLC (standing for Public Limited Company). You might think the word "limited" refers to our footballing ability but in fact it means that the shareholders are protected against having to pay any outstanding debts of the company if it fails. So their liability, if this were to happen, is limited to the amount they have paid for their shares. Manchester City PLC actually owns three other companies that make up the group.

One is Manchester City Football Club, which is self-explanatory. There are various reasons why the football club is owned by another company and one is that there were various restrictions placed on football clubs by the FA that can be got round by having a so-called holding company (not to be confused with a holding midfield player). This is a company that is set up for the purpose of owning a majority or all the shares in another associated company. Tottenham Hotspur was the first to go down this path in 1983.

The two other subsidiary companies are Manchester City Investments Limited and Manchester City Property Limited. The former "owns" the long term, £44m debt issued a few years ago and the other, I believe, "owns" the lease on the stadium (more of these in a subsequent article). The establishment of these companies may well have been a requirement for these transactions.

I hope this has given you some idea of the structure and ownership of MCFC. If anyone has anything to add to this or I have made any howlers then please feel free to tell me or preferably publish your views in MCIVTA. I would also be grateful for any feedback as to whether the level is right or not. In the next instalment I plan to look at the contents of the Annual Report and talk about the Annual General Meeting.


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