Cost of the UEFA problem

How hard will UEFA hit Rangers over the sectarianism issue at European games?

That is correct.  I do not know.  You do not know.  Martin Bain does not know.  Craig Whyte does not know.  David Murray does not know.  Even Chick Young does not know.  The members of the UEFA disciplinary committee probably do not know right now either.

Rangers were quick off the mark to try to set expectations by telling Chick Young that they expect a £100k fine and the rather novel punishment of Rangers’ fans not being given tickets for two away European fixtures.  We have come to expect no less from such a finely tuned PR machine.  (Rangers fans will dispute this assessment of their PR operation, but the club has faced up to the task of defending itself against the damage done by the KKK-style element in their support rather well).

What is puzzling about this is that we are lead to believe that a sale of Rangers could have happened this afternoon and will now likely be concluded tomorrow (if you believe the press).  If no one knows how bad things could be with UEFA, how can you place a value on a business that you plan to operate for the next few years?  The UEFA penalty could be anything from another slap on the wrist to a two-year ban from playing in all UEFA competitions.

The key point being that no one knows.  Students of this blog will already know that the value of any business is the “present value of all future free cash-flows”.  How can Craig Whyte judge the value of Rangers FC (and hence how much he should pay) if he does not know whether Rangers will be playing in European competition at all next season?  If Rangers are playing in Europe, will part or all of the stadium be closed to paying supporters?  Given that the club owes its survival at this point to the money generated in the UEFA Champions’ League from the last two years, how can Craig Whyte know how much to pay if he cannot even make a working assumptions about playing in the Europa League as a worst case scenario?

Which brings us back to a recurring theme in this blog: takeover or fakeover?  I am assured by some friends in the world of journalism and PR that Whyte really is serious and has a sizeable amount of financing already secured.  (No one has said that he has everything he needs at this time).  That these takeover stories appear with precision timing just ahead of potentially bad news for Rangers does feed the sceptical fire.

Perhaps Whyte is just waiting until UEFA announce their penalty and he will finalise his offer accordingly.  Or maybe it does not matter much to him one way or the other as he does not plan on running a football club?  The last two blog entries on here have expanded on the idea that the only way to really profit from owning Rangers is through a partial or full liquidation.  You protect your investment by converting it to debt (which will take priority in administration over HMRC) and would sell as many players as possible this summer and pocket the cash raised to reduce your exposure.  Then you either sell after a good result in the tax case (pocketing a respectable profit) or liquidate on a hefty loss to HMRC (making a smaller but still decent return).  In this scenario, the liquidation of current playing assets would cover all or most of your investment and your analysis might not be too badly affected by the cash needs for Rangers FC in 12 months’ time- for that would be a problem for some well-heeled real fan.

All speculation of course, but informed by experience and education that says that the idea of someone planning on making a legally binding committment to spend £52m over the next 5 years to own Rangers FC is just balderdash.  Applying a reasonable cost of capital of 10% to this investment, Whyte (or any future owner) would need to be able to extract over £5m per year every year to make these numbers make sense.  It is clear that Rangers’ owners (current and prospective) and the board of directors continue to lie to Rangers supporters about the takeover.  With the willing participation of the Scottish sports media, Rangers fans are being deceived yet again.

If a deal does go through, it will not be on the terms which have been “leaked” to the media.  Contrary to PR-placement stories, there is nothing stopping Craig Whyte from speaking publicly about his plans for Rangers.  The oft cited ‘stock-market rules’ require only that all shareholders hear what you have to say at the same time and that you tell them the truth.  So why does Whyte actually break these same much vaunted rules on a daily basis by leaking through his PR-lackies to the media?  Giving information to all shareholders at the same time is trivially easy in the Internet age.  So we are left with just one other restriction: the truth.  What is it that is being reported in the Scottish media that Craig Whyte is unwilling to say on-the-record?

I do not know whether Craig Whyte will buy Rangers or not, but I do know that Rangers fans are being misled.  Nothing about what has been proposed in the media makes financial sense.   So we are left to seek rational explanations elsewhere.

Making sense of nonsense

The Scottish sports media has set new standards of incompetence and pandering over the proposed Craig Whyte deal to buy Rangers.  The conventional story being fed by PR agencies working on behalf of both Whyte and Sir David Murray is that Whyte will pay off the bank debt (with the implication that the debt will stay at zero), that Ally McCoist will be handed a fantastic sum to rebuild the team, and that the tax bill will be “handled”.  Of course, these stories never quite explain how a bill that could be £54-60m will be “handled”.  These PR placement stories seem to treat the tax case as if it is a trivial issue which is not going to be a significant issue in Rangers’ future.

However, for all of the nonsense from journalists who earn a salary doing no more than typing their names on the by-lines of articles written for them by others, I am told that Whyte’s efforts to conclude a deal are gathering pace.  Whyte is working hard to finalise financing that would clear the bank debt (£20m on 30 June 2010) and would allow Lloyds Banking Group to wash its hands of Rangers.  It is understood that the amount that would be paid for Rangers’ shares is collapsing and approaching a price close to zero pence.  This would allow Sir David Murray to be off-stage should the Grim Reaper appear on the scene.  The tax liability would remain with Rangers FC.

The remaining issues centre on Dave King’s 5% shareholding.  The combination of MIH’s 85% and King’s 5% (held through Metlika Trading) would meet the 90% threshold required to force all of Rangers’ shareholders to sell at the same terms offered to MIH and King.  With 100% of Rangers’ shares, Whyte would be able to take The Rangers Football Club plc private.  With a privately owned company, Whyte would be free to conduct business without the transparency required of a plc.

However, there are challenges to obtaining King’s 5%.  King is still prevented by court orders in England and Scotland from buying or selling assets in the UK.  The recent transfer of ownership of Rangers’ shares from Murray Sports Limited to Metlika Trading was permitted as it was seen as a ‘value-neutral’ administrative transaction.  However, a sale of these shares, even for a very low amount, could be a legal minefield.  The other issue is that a businessman like King is unlikely to surrender a keystone position for free.  If his stake is essential to throw a dark cloak around Whyte’s plans for Rangers, then King will want to extract a fee.  Of course, there are ways to structure such a transaction.  King could take an equivalent value shareholding in whichever legal entity Whyte wishes to use as the vehicle for owning Rangers.  That could again be considered a value-neutral exchange.  (A “consulting-fee” paid from one obscure company in the Caribbean to another would be very difficult to trace too).

No doubt if a deal is concluded it will be accompanied by a media blitz celebrating a new era for Rangers and how nothing but blue-skies are ahead.  Missing from these PR-agency articles will be the treatment of the tax bills.  I am told that the tax bills will remain with Rangers.  In effect nothing in Rangers’ financial position will have changed except that Lloyds and Murray, two parties that would have been dreading being seen to take tough actions will have managed to get off-stage.  Rangers fans need to ask themselves about the new owner: is Craig Whyte a ruthless financial operator who will think nothing of maximising his personal gain or is he a lifelong Rangers fan taking on the burden to protect and rescue the team he loves?

Those who believe that Craig Whyte is simply a devoted Rangers fan with fathomless wealth who is prepared to use a lot of it for the betterment of his team should ask to see evidence of his devotion to the club.  How many years has he been a season ticket holder?  Where are the photos of young Craig Whyte in his Rangers top?  Before the information age, Celtic fans were assured of Fergus McCann’s bone fides within a couple of days of his name being mentioned in the media.  The Scottish media have been strangely silent about the result of the investigations into the affairs of Craig Whyte.

Is Craig Whyte a heartless asset-stripper who will not waste valuable resources on legal fees for further appeals if HMRC win against Rangers in the First Tier Tribunal?  Or is he a scene-stealing hero arriving to save the day?  Rangers supporters groups who have lined up to celebrate the arrival of Whyte have failed their members by not doing their own due diligence on this man.  Of course, in the absence of anyone else, they may feel that they have no choice.

The recurring theme of this blog is “it is all about the tax case”.  This has not changed.  A Whyte takeover will not alter the fate that awaits Rangers FC.  All that will be changed is that people who would have been reluctant to be seen to bring down the axe on Rangers FC have been replaced by someone whom few of us know much about.

Whispering The L-Word

In the few short weeks of the existence of this blog, we have seen Rangers problems with HMRC move from being dismissed variously as “Celtic supporter fantasy” and “it’s a  problem for the parent company, not Rangers” to Rangers’ own Chairman admitting that if the club get hit with the full potential of the tax bill, the famous Glasgow football team would be forced into administration.  It is with no small amount of pride that I note that media outlets in Scotland and the UK generally are using this blog as a reference.  If imitation is the sincerest form of flattery, then the number of blogs conducting outright plagiarism should be taken as a great compliment.  The scale and speed of change in the tenor of reporting has been dramatic.  I do not claim credit for all of that, but if this blog has helped push the truth forward, then it has been worthwhile.

To summarise the situation, Rangers FC are currently appealing tax assessments for underpayment of taxes of £24m and interest of between £10-12m.  If the club loses the current case, it will be the subject of a penalty hearing that could see an additional £18-24m being piled on top.  The evidence against the Ibrox club is overwhelming.  I have seen evidence that leaves me in no doubt that within Rangers the knowledge that what they were doing was illegal was both widespread and explicit.

In parallel with the tax drama, we have had front-row seats to a theatre of the absurd production: Rangers’ takeover saga.  With the assistance of a well-oiled media machine, public relations teams for prospective custodians have had little difficulty getting publicity.  Truth and transparency have been victims in these killing fields of agenda-driven misinformation.  Most damaging of all for Scottish football is that Rangers’ supporters have been handed a never-ending series of straws at which to clutch.

The takeover scenarios boil down to two options currently: Craig Whyte and a hurriedly thrown together trial-balloon linked to current Rangers directors Paul Murray (no relation to former Chairman, Sir David) and South African-based Dave King.  Murray and Lloyds Banking Group appear to be throwing their weight behind the Whyte plan.  However, the sub-committee of the Rangers board charged with assessing Whyte’s proposal are less than impressed.  Everything I can glean from this situation suggests that they are right to be concerned.

Whyte does not have the money to fund the takeover on his own.  However, he does appear to have secured some of the credit required to allow him to conclude a deal.  His plan would be to pay off the bank completely (allowing Lloyds to get off stage and to be nowhere near the scene should the tax bill hit).  Sir David Murray will also benefit by putting as much distance between himself and the imminent disaster that awaits what was once the jewel in his crown.  (I am very doubtful if Murray will receive much, if anything, for his shares.  Rangers’ shares are truly almost worthless to any informed investor just now.)  As discussed in the previous blog, it is a virtual certainty that Whyte will flip the debt taken on to finance the deal back on to Rangers FC.  So far from becoming debt-free, the debt may actually increase as a result of this transaction.  (Whyte’s reluctance to speak on the record provides the cover of deniability when the saviour status accorded to him in many corners of the press falls short of reality).  The deal for Whyte becomes a low-cost gamble.  If the tax case hits, he and his creditors will have priority to pick over Rangers’ bones.  It is likely that he seeks more control than the 85% shareholding Murray can give him to further enhance the claims of Rangers’ new creditors in the event of administration.

If Whyte is able to clear the bank debt for £20-21m, he can get rid of Murray for a nominal fee.  There are other creditors who would not be cleared now, but so long as they can be subordinated down the creditor priority list in the event of administration, they will not matter.  In this scenario, Whyte may not have much reason to care about the tax bill!   If Whyte’s due diligence has produced fire sale valuations of Ibrox, Murray Park, and player contracts in place at the time as exceeding this total, then he and his backers have no reason to fear the tax bill.  The worst case would be that they get their money back.  The best case would be that Rangers win their appeal of the tax bills in their possession and they could then sell the club for a decent profit.

There are a couple of challenges with this analysis.  Firstly, it takes a very generous valuation of property values around Ibrox and Murray Park to get close to these valuations.  How much will continuing player contracts be worth in August 2011?  Others will be able to estimate these values better than I can, but I struggle to make this deal add up.  That would not present a problem.  In every deal, there is someone whose optimism and valuation exceeds that of the man on the other side. Much more serious for Rangers fans are implications of such a strategy for Rangers as a football club.

Under the status quo, Lloyds would be treated as a secured creditor.  HMRC would have by far the largest claim on Rangers assets, but would be an unsecured creditor.  With total debts in the region of about £90m, Rangers’ survival would depend upon Lloyds and HMRC agreeing to accept pennies on the pound and allowing the football team to continue in operation.  The PR problems that would face a High Street bank in being held responsible for closing Rangers would help build pressure for both Lloyds and HMRC to do a deal.  However, a new creditor in the form of Whyte and his backers, would be more immune to such special pleading.  Their business plan would explicitly require that they do not share with any of the subordinated creditors.  HMRC can veto any creditor deal that would keep Rangers going.  Whyte and backers would only be able to force the discussions to a conclusion that sees them take virtually all Rangers’ assets by pushing for…  the L-word: Liquidation.

This explains the hostility to the Whyte proposal from the existing Rangers board.  Whyte is anything but a messiah, and actually amplifies the risks to Rangers’ existence.  Venerable Rangers-first types like Johnston and Greig would see that far from revitalising their club (as the PR leaks promised), this is a vulture capitalist play.  It is actually quite a good and credible distressed debt investing opportunity that exploits the aversion of Lloyds, and in particular, Sir David Murray to be on stage when the curtain could fall.  The only real mystery remains over quite why Whyte wants the support of the board.  With 85% of the shares, he would be free to fire the board within minutes of taking over.  Per the previous blog, 15% of shareholders can block a change in shareholder rights.  There may also be a ‘poison pill’ provision with this threshold as part of previous deals with Dave King.  This remains yet another factor that the main players seem reluctant to clarify, but Rangers fans and small shareholders must be used to being lied to and misled by now.

The Paul Murray / Dave King situation seems to be a poorly thought out effort to maintain morale while they oppose Whyte.  Putting actual cash into Rangers FC just now by a capital increase would be a waste of money prior to the tax case being resolved.  After the tax case, if Rangers, by some strange quirk of fate, manage to win, there will be plenty of financing options available, and one that leaves the bank and/or Sir David Murray in place would not be amongst the most popular.  However, we come back to the central point of this blog: no discussion of Rangers’ finances or ownership can be made without reference to the tax case.  We have already deconstructed the idiocy of believing that anyone else will pay the tax bill on Rangers’ behalf.  It is a stupid notion that could only be promoted by the most cynical or the most innumerate.  The Whyte plan appears to greatly increase the chances of Rangers FC disappearing altogether should he win his battle but the club loses the tax case.

“Interesting times” for Rangers

The following post was written before news of bombs being delivered to prominent Celtic supporters was released. It seems incongruent to discuss trivialities like Rangers’ financial future while the lives of people are being threatened. These individuals’ crime is to have had the temerity to support their football team publicly and to speak truth to power. Anyone with an ounce of decency, regardless of creed or national origin, would both condemn and take action against those who incite or lend succour to those who would bring such shame on Scotland and our national game. This blog stands with all those who have been threatened. They will never walk alone.

The mythical Chinese curse “may you live in interesting times” seems to have fallen upon all things connected to Rangers FC in the past week. UEFA charges for sectarian singing by Rangers’ supporters at European games, the start of the First Tier Tribunal for the tax case, and yesterday, the beginning of what looks like a blood-feud over reported efforts to become the owner of the club. With so much going on, it is difficult to know where to start, but the freshness of information on the Whyte takeover effort should probably lead. We will cover Dave King’s tax affairs in South Africa in a separate post.

I received credible information in the past three days that Craig Whyte has indeed been trying to buy Rangers. He has been making strenuous exertions to line up debt financing, but does not have the money to make the move on his own. This helps answer some questions about recent reports, but poses several others:
– Why would anyone want to buy Rangers just now?
– Why does a ‘rubber-stamp’ board sub-committee appear to have such influence over a deal claimed to be done with the holder of 85% of Rangers’ shares?

To the first question, this blog has made clear that it views any attempt to buy Rangers would require a large amount of stupidity. However, an alternative hypothesis may be provided by the answer to the second question.

Murray International Holdings Ltd (MIH) currently owns 85% of Rangers’ shares. On the surface this should be a simple transaction. Agree on a price to which MIH will sell its shares and it really becomes a “done deal”. MIH is effectively owned by Lloyds Banking Group through the 165m in convertible preference shares issued to the bank’s private equity arm. So nothing can happen within MIH , in practice, without the bank approving. It is reported that the Lloyds wants to be free of the albatross that is Rangers and is insisting that any sale comes with a complete clearance of Rangers’ debt. So, the reported deal that Whyte is offering, clearing the debt and paying a little for the equity, should be a no-brainer. Whyte is obligated to offer the same price per share to every shareholder, but that would likely be pennies per share. It would not matter if not a single other shareholder agreed to sell. With MIH’s 85% of the shares, you own Rangers FC to a greater extent than Sir David Murray (norminal owner of MIH) ever did.

Which brings us to the strange situation of a ‘rubber-stamp’ board with no authority apparently wielding the authority to derail a deal between a willing buyer and an enthusiastic seller. As we have maintained from the beginning of this blog, what Rangers’ fans are being told and the truth about this situation will be very different. So it seems that the answer lies in the question: “What can you not do with 85% of the shares of a company that board support might grant you?”

Let us start by demolishing the ignorant and false statements made on Radio Clyde last night by Roger Hannah. This pathetic excuse for a journalist must have set a new record for the sheer number of false statements made by anyone in a single broadcast. I do not expect football hacks to understand corporate finance to any degree, but to not even know SPL rules regarding point deductions for administration and to bluster as if you do, is just embarrassing. His other claims that Dave King’s tax troubles in South Africa have been resolved are at variance with the facts. (Roger, why not just say that you do not know? Why just fabricate “facts” that provide a comforting narrative to Rangers fans in the face of disturbing truth?)

So we come back to the question: why would an owner of 85% of a plc care about the opinion of a board of directors that he can fire five minutes after concluding the deal?

The answer probably lies in the arcane nuances of The Companies Act. The only provision of this act that confers power on the missing 15% of Rangers’ shares is “you have the right to apply to court to object to a variation of class rights“. Unlike the feckless Roger Hannah, I will not pretend to understand all of the nuances of this aspect of the law when in fact I do not. In truth I post this information here in the hope of attracting input from people with more specific expertise than I have. However, I can speculate what is going on.

What is in this for Whyte:
It would make no sense for Whyte to borrow a lot of money in his own name and to use it to buy Rangers FC in advance of the a decision on the tax case. If Rangers lose, as seems likely, he would lose his shareholding and would be left personally bankrupted by the debt. It would be a double-crunch and would be breathtakingly stupid. However, the Glazer model is instructive. If Whyte is able to move the debt to Rangers FC he would not be personally liable for its repayment in the event of the tax bill crushing the football club. In fact, under such a condition, if he gets MIH’s shares for next to nothing, it would become something akin to a ‘synthetic call-option’ in financial jargon. In plain English, it would give Whyte a 100/1 bet on the tax case. If Rangers lose, he did not bet much and would not pay for the downside. If Rangers manage to win the tax case, he would be able to sell the shares for something close to a £15-20m rapid profit. The challenge is in getting financiers to lend money for the venture, and this may be where the need for board support comes in. The lenders would want to make sure that they have super-priority over all of Rangers’ assets in the event of administration and liquidation. Is it possible that to provide the super-priority required to assure lenders that they would get their money back, and could participate in the bountiful profits of the tax case going well, that the rights of ordinary share holders in Rangers FC would need to be modified? This would require that Whyte owned >85% of the shares to guarantee his prospective backers that their deal was foolproof and the MIH shareholding falls short of this threshold. Just some informed speculation, and I would welcome comment from those with experience in the significance of this or other thresholds.

Such a deal would mean that Whyte was in for a quick kill. His ownership would be brief under any circumstances: rapid progression to administration or a quick profitable sale. There would be no need to squander money on working capital. Rangers, the football team, would be left to twist in the wind. Thoughts anyone?

Campbell Ogilvie

Campbell Ogilvie is already a man of quite some distinction.  However, his list of accomplishments might be about to become a bit longer.  It appears that he has sat on the board of directors of not just one SPL club entangled in highly dubious tax schemes, but two.  Heart of Midlothian FC look likely to be the next shoe to drop as football’s culture of thinking that it is above paying taxes starts to unwind.

Ogilvie, the current SFA Vice-President and heir apparent to George Peat’s job of President, is going to have quite the CV by the time he hangs up his pinstripes.  Not only was he a director of Rangers FC when the EBT scheme was first introduced, but he was also the company secretary.  This latter role gave him additional responsibility for ensuring statutory compliance for The Rangers Football Club plc.  So while some Rangers directors, like John Greig, might have a claim that their position was symbolic, and they did not understand what was happening or what their responsibilities as a director are, it will be difficult for Mr. Ogilvie to do likewise.   As a man with substantial experience and training, he will find it difficult to claim that he did not know or understand what was happening.  (He may try anyway).

However, Ogilvie seems likely to find himself in the unique position of being at the center of yet another tax avoidance/evasion storm.  On leaving Rangers in 2005, Ogilvie joined the board of Heart of Midlothian FC, and in 2008 became managing director of the Edinburgh club.  A source has contacted me with the story that the Scottish Professional Footballers Association (SPFA) has made a complaint about employment practices at Hearts. This came to light when a Hearts player applied for a mortgage.  When presenting his salary advice, it was clear that he was on a rate close to the UK minimum wage. The player naively explained that he had lots of money, but that it was all paid overseas.  The SPFA would obviously have concerns that Scottish players will appear expensive in an era of 50% marginal tax rates compared to low-tax (or no-tax?) foreign players.  This raises a few questions: How many players are involved? How long have such practices been in effect? Are there players who have not been registered for tax at all in the UK? The scale of the Hearts problem is not yet fully known.  If this has been standard practice over an extended number of years, then the bills, interest, and penalties could also be of a magnitude that could put the existence of Hearts at risk unless Mr. Romanov decides to dig deep into his personal reserves.

Once could be just a mistake.  Twice looks very careless.
Scottish football supporters, as well as SFA member clubs, have a right to know “what did Campbell Ogilvie know, and when did he know it?”

It appears that one of two situations must exist: either Campbell Ogilvie knew of, and approved of, two high-risk / illegal tax strategies or he has failed in his responsibilities as a company director at two major Scottish football clubs.  Does Mr. Ogilvie have a casual disregard for the law or is he just an ignorant puppet dancing on the strings of charismatic impresarios?  Either way, it would be a matter of major concern to all those with an interest in Scottish football if either is true.  If there is another explanation for why he has had such a knack of being on the wrong boards at the wrong times, then Scottish football supporters need to be told.

Did Ogilvie bring dubious practices to Hearts from Rangers or was he an innocent bystander at both clubs?
Did Rangers register all of their overseas players for UK tax?

In light of his unique experience with two of the three largest football clubs in Scotland sliding to the edge of darkness, perhaps Celtic supporters should not be so concerned about Ogilvie inheriting the job of SFA President.  Given recent statements about the need to ‘pull down the walls’ and to rebuild the SFA from the ground up, who would be better qualified to at least bring about the first part?