Whispering The L-Word
22/04/2011 209 Comments
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.