Wednesday, July 04, 2007

The Takeover: Q & A

After initially announcing that they were in talks on the morning of the AGM last December, the takeover is finally real, with the offer documentation being received by shareholders last week. We have always made it clear that we could not comment on any bid until the details were known but now we do know, as far as the terms of the offer are concerned, what Dr Thaksin has put on the table.

The basic terms of that offer are well known. The bid is being made via a recently formed company called UK Sports Investments Limited (UKSIL). This is owned by another recently formed company called UK Sports Investments Holdings (UKSI). Both companies are controlled by the Shinawatra family and UKSI has provided the money for the bid to UKSIL.

40p per share is being offered to shareholders and, at the time of writing, three of the four major shareholders have given irrevocable commitments to UKSIL and the fourth, BSkyB, have agreed to sell their 9.88% holding. Along with other commitments, UKSIL is now believed to be close to having 75% of the shares of Manchester City. The acquiring of the 55.9% of shares originally promised to UKSIL will actually only take place once the level of 75% is reached. Until then, it is effectively an agreement to sell.

At the same time, it would appear that Sven Goran Eriksson has been lined up as our new manager but this is also apparently subject to UKSIL getting 75% of Manchester City’s shares.

So what are the key issues and the views of the Trust on all this? We have been asked a number of questions about the takeover and will try to answer them as far as we can. We have to make clear that none of the people involved with the Trust are authorised to offer investment advice and that a suitably qualified professional should be consulted where necessary.

Why has this taken so long?
The club made an announcement in early December, on the day of the AGM that they were in talks with parties that may or may not lead to an offer. We know that the board had been seeking investment for some time and believe that at least two consortiums had approached the club some time before that announcement and that one had possibly walked away before it was made. So we are still not clear who the actual party or parties were that they were talking to at that time. However, it seems unlikely that it was Dr Thaksin. He came along much later and there is a clear legal and regulatory framework to be followed, all of which takes time.
Clearly the club could not move forward without some element of certainty and had said they were making plans for next season, in the event that no bid transpired. However, all parties have left it late, with the squad returning for pre-season in a few days and the bid still not certain of success.

Is 40p a share a good price?
The issue of company valuation is extremely complex. There is no single reliable method of valuation but there are some indicators. One is Net Asset Value, which is the value of the company’s assets less its liabilities. In the May 2006 accounts, this figure was just over 70p per share. However, we have had another year end since then and will presumably have made a further significant loss, reducing this figure much closer to the offer price. However football club accounts don’t include the market value of players, plus City value CoMS as though we own it, whereas even though it is a revenue generating asset, we obviously don’t.

It also depends on what you paid for your shares. If you paid £1 then it’s clearly a poor return but not if you paid 20p. Many small shareholders bought their shares in order to have part of the club so are not primarily interested in the price.

Why is this 75% figure important?
Under normal circumstances, the backing of a simple majority of shares is enough to make decisions. So at the AGM when directors or the auditors are up for re-election, it only takes 50% plus 1 share to carry or defeat these motions. However, to do anything more significant usually requires a special resolution to be passed and this can only usually be done with the support of 75% of the shares.

Some of the relevant decisions that would require a special resolution include a proposal to take the company off the stock market and into private ownership and the necessary financial arrangements to formally complete the takeover. So this is why a figure of 75% is usually the point at which the bid becomes unconditional. If that target is not achieved within the offer period then UKSIL can, in theory, walk away from the deal. They could also take what they have and become majority shareholder, with the company remaining as a listed company (unless enough of the minority shareholders agreed to de-list).

What happens if they get 90% of the shares?
Once this level is achieved then UKSIL can force any remaining shareholders to sell at the offer price. Then the supporters will have no further stake in the club and it will be totally owned by Dr Thaksin and his company.

And what happens if they don’t get 90%?
If the 90% level is not reached then any remaining shareholders will remain as minority shareholders and, with the company de-listed from Plus Market, would find it difficult to sell in future. However, they would still have a stake in the club, which is why many people bought their shares originally.

So will we still have the chance to go to the AGM in this case?
This is a good question. Under the recent Companies Act 2006 as far as we understand it, a private limited company won’t have to have an AGM unless it wants to or 10% of the shareholders request it. A public limited company (as Manchester City plc currently is) would have to have one, even if not listed on a recognised stock market.

UKSIL has been registered as a private limited company so can avoid the requirement if it chooses to do so. The offer document has also made it clear that Manchester City will be re-registered as a private limited company once the take-over becomes unconditional. So it’s possible that there will be no further AGMs unless either 10% of the remaining shareholders demand it or Manchester City agree to have one voluntarily.

Are we now debt-free?
As most people know, there were two main debts. One was the £43m in long-term loans (15 & 25 years) secured on future income. The other was the £19.7m loans from John Wardle & David Makin. The offer document has made it clear that these latter, unsecured loans have been re-assigned not repaid. This presumably means that Manchester City plc now owes UKSIL this money, in return for the £17.5m payment from UKSIL to Messrs Wardle & Makin.

In the offer document (Page 63 Paragraph 6.2(a)), there is the interesting information that we were even further in debt than we thought, having borrowed £10m in December 2006 against the Sky payment due in August. It would have been interesting to see the reaction of shareholders to that at the next AGM!

Dr Thaksin was asked about the secured loans in his radio interview and intimated that these would have to be kept as they were for the foreseeable future. There may well be very good commercial reasons for doing this.

As part of this transaction, UKSI has lent UKSIL £40.6m. This presumably covers the £21.6m for shares and the £17.5 payment for assigning the unsecured loans, plus any costs and other incidental expenses. There is interest on this loan of 11.96% per annum but this will only be payable if UKSIL has sufficient income to do so.
Any long-term arrangements won’t become clear until after the take-over has been finalised so it’s currently impossible to answer this question but at this moment it seems that we still owe around £60m, as before, plus the additional £10m.

Can someone else still make a bid?
Potentially yes but this is unlikely as they would need to get over 25% of the shares to stop the UKSIL bid being declared unconditional and it would appear that only 30% at most are uncommitted.

So the only way that anyone could possibly get more for their shares is if UKSIL didn’t get 75% and decided to offer a higher price. However, this looks extremely unlikely indeed, so it’s 40p a share, take it or leave it.

Is the Trust happy with Thaksin Shinawatra as Manchester City owner?
Much has been written about Dr Thaksin in the media and message boards over the last couple of months and we don’t intend to go over old ground. The Thai military government seems determined to land a killer blow on him but he has not currently been convicted of any offence. It is also clear that the determination of the Thai military government to prove something against him is largely politically motivated. The news that the UK authorities are allegedly talking to the authorities in Thailand about the situation is also worrying.

There has also been some speculation that Dr Thaksin will use his ownership of Manchester City to maintain his political profile in Thailand and this is something that worries us. Our club should not be the meat in the sandwich between rival political factions in Thailand. That, and the continued uncertainty about the source of his funds and what action the Thais might or might not be able to take means that, in our view, he represents a potential risk.

That’s not to say that these things won’t get resolved and that he couldn’t do a good job for us though. In a culture where “face” is important, he has a huge incentive to make the club successful. He is also undoubtedly a huge fan of English football and appears to have significant financial muscle, which we desperately need. In his recent interview on Radio 5 Live, he won many people over with his measured and intelligent response to the questions asked (although it would have been interesting to hear the questions that he was reluctant to respond to). As a successful politician and businessman, it may be that he possesses the right mix of skills to finally drive the club forward.

He has made it clear that he will conduct a full strategic review of the club’s operations before making any changes and, if he does so, we would applaud that wholeheartedly. We have made no secret of the fact that we felt the previous board should have been bigger and stronger and there was room for improvement in the way the club was run commercially.

Our timescale for passing judgement is over the next 3-5 years. If in that time we have a successful and entertaining team, an academy at least as strong as the one we have now, a club that is performing well financially and is self sustaining in that respect then the take-over will have achieved the objectives that we have been asking for. The Trust will still continue to ask the questions that we believe need answering and do whatever else we can in order to ensure the club goes in the right direction. We still hope, whoever the owner is, to work with the club, alongside the other supporters’ groups to ensure the interests of our supporters are at the forefront of the club’s agenda.

So, what should we do?
The Supporters’ Trust movement believes implicitly that clubs should belong to their supporters and that the fans are the only true custodians of their clubs. However, it would appear that UKSIL will gain the necessary 75% to make the offer unconditional and that we will have a new owner and manager before too long. Many people, whether they have misgivings or not, believe that this is the only way forward for our club and will sell their shares in order to facilitate this as soon as possible.

Some people, while recognising that the club is going nowhere without significant investment and a new sense of purpose in the boardroom, still hope that they will be able to retain a minority stake in their club and will hold on as long as possible. Therefore if UKSIL fails to get hold of 90% or more of the shares these fans will have a minority stake in the club. This may mean that they would find it much more difficult to sell their shares in the future and have little hope of influencing events. The Trust, which holds no shares on its own account, would still aim to be an umbrella for those holdings.

2 Comments:

At 10:37 pm, Anonymous Wigan Blue said...

Leaving aside political considerations, which as you say, have been hacked to death, I have certain criteria of my own. If Thaksin Shinawatra can supply:

Attacking, buccaneering, football.

A situation where the supporters are given decent service (for example, English speaking personnel. good food and drink and prompt service) in the concourses.

A situation where the stewards apply exactly the same rules to our own supporters as they do to the visiting supporters (eg: No restrictions on standing).

Then let him go for it, with my 100% backing.

You seem concerned about the 'Private Equity' angle. After recent revelations (eg: MUFC, the AA and Saga), those loopholes will be closed, so he'll have to cough up the extra anyway. He knows that. So we'll finally be debt free.

He should be over the 75% mark tomorrow, or Friday at the latest, but I for one would be happy to see it stop before the 90% mark and let you guys have an interest.

 
At 11:30 pm, Blogger Thad said...

Thanks for posting this, though I do wish the Trust had been willing to comment earlier before this was a fait accomplit. I'm glad the Trust is committed to representing supporters even after the takeover, in some fashion. It will be important to establish some vehicle capable of holding the club and its new owner accountable.

FWIW, here is a long essay on the takeover I put together that I reckon many City supporters will be interested in seeing. It reaches a similar conclusion as this q and a.

http://rspas.anu.edu.au/rmap/newmandala/wp-content/uploads/2007/07/thad-williamson-2007.pdf

 

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