“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?