How much would you pay for Rangers?
08/04/2011 75 Comments
The subject of what a rational investor would pay for Rangers FC could occupy several dissertations. This post will take a look at Rangers’ financial track record and ask why someone of little proven wealth, and a weak history of supporting Rangers, would even want to take on the burden of being Rangers’ custodian. We will see that it makes no financial sense for anyone to make Rangers’ fans dreams come true by picking up the madness where David Murray left off.
The formal definition of the “intrinsic value” of any business is the “net present value of all future free cashflows”. Free cashflow (and its more descriptive alternatives such as “owner earnings”) basically means the money that the shareholders are able take out of a business. (It is formally defined of the operating cashflows generated by the business minus the capital investment cashflows required to generate the operating cash). For a football team, the operating cashflow is basically your net profit for a year with non-cash deductions like amortization added back, and the cash effects of delaying paying bills or getting your own bills paid faster taken into account. The capital expenditure cashflow for a football team will be the net cash spent from player transfers in and out, plus anything you spend on major stadium upgrades. The difference between how much cash you bring in and how much you reinvest in the business, is money which the owner could take for himself. Add up all of the free cashflows for future years (discounted for cost of capital of course, but let us not deal with the finer points here), and you have the value of a business. Any business.
As an aside, other valuation techniques derive from this basic principle and have been developed because predicting future free cashflows accurately can be difficult. However, when we are looking back in time, we can calculate the free cashlows accurately from the audited accounts of any business. So it will be instructive to look at how much free cashflow Rangers have generated since Murray International Holdings Ltd bought over John Lawrence (Glasgow) Ltd’s controlling stake in December 1988.
Ready? Adding up the numbers from the annual reports for every year since 1989 – 2010, Rangers have generated the princely sum of -£176m. Do not miss the minus sign there! The historical record over a 21 year period is simply that owning Rangers is a financial disaster. As £1 in 1989 bought much more than £1 today, if we took inflation or cost of capital into account, this number would be dramatically worse.
So, we might think that Sir David Murray must have supplied all of this cash. If so, he would surely be deserving of his ‘generous benefactor’ press clippings. Well this media promoted notion collapses under scrutiny.
This is how this money was funded:
|£ 12||The Rangers Bond||Paid by supporters for the Club Deck|
|£ 12||Grants||Government & The Football Trust etc.|
|£ 78||External Investors||ENIC, Dave King & others|
|£ 50||MIH Capital Increase||Underwriting of failed share issue|
|£ 23||Increased bank debt||HBOS/Lloyds|
We know that ENIC invested £40m and that Dave King invested £20m. Several other directors also invested in Rangers through same vehicle as Dave King (Murray Sports Limited). MIH may also have contributed some at this stage, but Murray’s main claim to having been a benefactor was in underwriting the failed share issue in 2005. This exercise took place at a time when Rangers’ debt exceeded £83m and the media was starting to ask questions about the stability of the club. What looks in retrospect to have been cynical ploy to just get Rangers’ financial mismanagement off the back pages has yet to actually cost Sir David a penny of his own money in practice. (HBOS/Lloyds have, and will, pick up this bill).
Reasonable people can have a fair argument about this analysis of David Murray’s contribution to Rangers through the underwriting of the share issue. However, the discussion of his contribution to Rangers is incomplete without looking at how much he has withdrawn. His famous boast from over a decade ago that he has not taken a penny from Rangers would be more difficult to make in recent years. When we look at the Related Party Transactions in Rangers’ accounts, we see that beginning in 1997, Murray starts to charge Rangers for services provided by a variety of his companies. The net balance of David Murray’s declared transactions with Rangers FC amounts to a total of £26m between 1997-2010. At its peak in 2004, Sir David’s other interests were taking out £3.9m per year more than they bought from the club. When you take £1 out of a company in which you personally own only 60% and move it into a company in which you own 90-100%, you have made money at the expense of your other shareholders. Nothing illegal about it so long as it is declared, and it is for the other shareholders to complain and stop you. Quite whether Sir David’s other businesses (some outwith MIH) were uniquely capable of providing the best possible pricing for their travel arrangement, call center services,etc. only Rangers’ employees will really know. However, the idea that Sir David Murray has been a selfless benefactor for Rangers is definitely open to question.
So back to our original question: how much would you pay for Rangers? On the basis of past performance, nothing at all.
Yet we are supposed to believe that a rational businessman (despite not having sufficient independently verifiable wealth) is willing to part with £25-33m and to carry the risk of losing either all of his shares in the club or paying an additional £54m for the EBT tax problem? Whatever is really going on at Rangers just now regarding the claims of imminent takeover and what we are being told will be very different.
Sir David Murray expoited a brief window of optimism in Scottish football where it was possible to part fools and their money with hopes of ever increasing TV revenues, European leagues and entry into the English Premiership. (Celtic did much the same thing with its own share issues). Today, that window has been boarded shut. External sources of funding will be difficult to obtain. Even a bank overdraught will be difficult to retain. Buying Rangers today is a job for someone with billions who does not care about the business case nor the tax bill. If we had objective journalism in Scotland, we could start an intelligent discussion and investigate: how much money does Craig Whyte have; what are the sources of his claimed wealth; and what are his real motivations?