Martin Bain: Defending The Indefensible

Anyone else struck by the undignified tone coming from Rangers’ Chief Executive Martin Bain in recent days?

His statement released after the shocking decisions from the SFA disciplinary meeting yesterday included the following:
We are, however, disappointed that our players’ misconduct was, in the opinion of the disciplinary committee, to be of a significantly serious nature and we will study the reasons for this when they are given in writing.”

In response to the sectarianism charges from UEFA, Bain said:
“We do, however, believe that it is absurd to think that only Rangers supporters sing offensive or sectarian songs. That is patently not the case and we are left to conclude that there is a disproportionate focus on Rangers. It has also become clear there are people who have been determined to undermine our Club at any cost and have constantly lobbied UEFA and other organisations to take action against Rangers.”

Tortured logic and simple denial are evident in both quotes.  Even when handed a gift that he could not have expected from the SFA (unless he had been informed in advance), Bain tries to boost his credentials as a defender of his club and their fans.  He is obviously playing to the cheap seats.  Much maligned in the past by many Rangers fans for what they saw as a failure to defend them in the litany of troubles created in their recent European adventures, Bain seems eager to ingratiate himself with the club’s more extreme elements.

That he would want to mend bridges with the FollowFollow crowd is understandable.  For a family man who lives just outside Glasgow, knowing what the future is likely to hold must weigh on him terribly.  There must be an awful fear that as Chief Executive during most of the period when the EBT scam was in operation, he will be held responsible.  There is a better-than-evens chance that he could be the last Chief Executive of The Rangers Football Club plc.  Imagine the scorn that will be directed his way when it becomes clear that not only is the tax case a real threat to the existence of the club, but that Bain has participated in downplaying the risks while knowing the full facts.  His actions have hampered Rangers fans’ abilities to prepare for the worst case scenario.  There are many fans who would never forgive him once the seriousness of the club’s situation becomes widely accepted.

Imagine how they would feel if they thought that his culpability extended beyond merely failing to stop the plan, but if they were to discover that he was also a significant beneficiary of the scheme?  Such a conflict of interest would surely tear away any coat of armour Mr. Bain thinks he is building through his newly discovered gruff voice.

McCoist sounds the alarm?

“I’m sometimes not sure the supporters realise just how serious our situation will be if we are not taken over. Some of them do but I honestly believe the vast majority don’t.” Alistair McCoist quoted in yesterday’s Scottish media.

When the history of these tumultuous days is written, I hope that mention is made of the efforts by both Walter Smith and Ally McCoist to signal to the club’s supporters about the dangers that lie ahead.  Not everyone is reading the signals well. The usual head-in-the-sand brigade who dominate Rangers supporter websites see these words as playing some role in a fanciful pincer-movement designed to get Craig Whyte to sign on the dotted line.  We are all entitled to opinions, but it seems quite obvious to me that this is a sincere attempt to warn fans without upsetting his employers: the Rangers board of directors.

Both McCoist and Smith have to walk a thin line in what they say.  Their bosses on the board, and the nominal owner in Edinburgh, have all signed off on the scams that place Rangers in mortal jeopardy.  They are all as guilty as Sir David Murray in that they failed to fulfil their fiduciary responsibilities as directors.  They have mismanaged Rangers FC and most of them will understand their culpability. I suspect that Alastair Johnston’s frank comments and head-nod were an attempt to insulate himself from both blame and liability.  He does now have a defence of  “Well I did tell you!”  The subsequent restatement of the boilerplate about legal opinion and optimism will not be mentioned if the worst-case scenario kicks in.  He has his excuse at the ready.

The other directors have not been at all forthright.  Their failure to level with Rangers fans, and to have participated in the deception that anyone would buy Rangers before the tax case is settled, is a betrayal.  They will feel that they have no choice but to follow the road they have chosen regardless of its destination.  After all, each director “signed off” on Rangers’ tax strategies in each of the last ten years.

On seeing what was at best a high-risk venture, and at worst a criminal enterprise, someone should have had the courage to speak up on behalf of the club and its fans.  John Greig might have been one, but as a lifelong football man, it is questionable whether he would have understood what was was going on.  As an aside, Greig’s seeming inability to act reflects on the unsuitability of purely football men for seats on any board of directors.  Directorships are not sinecures or retirement watches.  Directors have a broad range of legal responsibilities and need to have the education and experience to do the job.

The failure of Rangers fans to heed the many warnings means that time may not be available to act.  The most prominent internet supporters have gone to great exertions to stifle any discussion of the tax case over the last year.  Feeding a constant stream of soothing disinformation under the guise of being ‘in the know’, they have built hope and faith in the idea of imminent rescue and that the tax case is not a problem anyway.

How else can Rangers fans explain the current restrictions on how their club operates?
With funds from two consecutive Champions’ League group qualifications and debt that is moving in the right direction, why else would no one be rushing to buy one of the premium brands in the world of football? Do you really believe that Lloyds are singling Rangers FC out for special treatment? (Yes, I have read the ‘stab in the back’ theories propounded by bloggers. When the truth is awkward, find a scapegoat. It is not a new idea.)

Will Rangers fans accept reality in time to organise some form of rescue? Or will the fate of their team be left in the hands of vulture capitalists who specialise in picking over the bones of companies in administration?

It is very unlikely that HMRC will use its option to file criminal charges in this case, but that is at its own discretion. A bigger danger for anyone who served on Rangers board since 2001 is that the fallout from losing the tax case might bring lawsuits for failing to do their jobs. There is no guaranteed result in the First Tier Tribunal, but the evidence is stacked against the club. Unless the three judges sitting on the tribunal are as sympathetic to their plight as an SFA Disciplinary Panel, the coming weeks will involve many sleepless nights for Rangers’ board of directors.

One week to go

In just over a week, the First Tier Tribunal hearing Rangers’ appeal over the tax assessments in their possession will resume.  Of course, you all knew this already.  The blanket coverage of this issue in the Scottish media has been overwhelming.  Journalists have been hounding Martin Bain and demanding information on ‘what did you know and when did you know it’.   The saturation television coverage with experts explaining the intricacies of trust law to a spellbound public has been intense.  At least this is how the most important single event in the history of Scottish football should be reported.

It is not an exaggeration to describe the tax tribunal as the most important event in Scottish football history.  As Rangers’ Chairman admitted, if the full amount of the bills goes against Rangers, then the football club simply could not pay.  No bank would lend them the £36m for underpayment and interest which could crystalise sometime between July and August (holiday schedule permitting).  If Rangers lose this tribunal, another one will be scheduled to deal with the penalty for deliberately breaking UK tax law.  The penalty is currently £18m but could be finalised anywhere between 50-100% of the original underpayment if HMRC can prove that Rangers knew what they were doing was illegal. (And they can).  It could take another year before the penalty is finally determined.  This delay in getting all of the numbers creates a complication for any attempt to restructure Rangers’ debts in administration.  It makes arriving at a deal to which 75% of the creditors agree very difficult. That Lloyds have a security interest in Rangers assets which will ensure that most of Rangers’ bank debt will repaid before most other bills does not make for an easy restructuring.  It is hard to see how total liabilities of £90-96m can be satisfied by any sum that someone would offer for Rangers assets in administration.  Liquidation of Rangers FC is not a fanciful notion.  It is not by any means a certainty, but anyone saying that it will not not happen does not understand the situation.

So while Rangers enter the final stages of a process that has as a possible outcome its complete liquidation, what are the Scottish media discussing?

Granted the latest kerfuffle about sectarian singing is easier to understand.  However, the greatest significance of the sectarian debate is the effect of the singing and the potential reductions in vital European football money would have on a prospective buyer.  Yet this angle has not been discussed.
The on-going saga on the “fakeover / takeover” continues to promise ‘another 48 hours” or “the end of next week”.   Sources reported to be close to Craig Whyte have been breaking every principle of The Takeover Code’s disclosure requirements.  These disclosure provisions are designed to ensure that all shareholders gain information about a takeover at the same time.  They are not intended to drop a total secrecy blanket around any takeover.  Yet, the Scottish media conveniently protect their friends  by claiming that Murray, Whyte, Ellis, King [insert name of other “billionaire”] cannot comment.  They can.  Whyte and Murray are just chosing to say nothing.  Yet, the same journalists think nothing of receiving private information from “sources close to Whyte”.

The last two weeks were an interesting time to revive the takeover tale.  Rangers’ reported Interim Results that most expected to be better and that disclosed another tax problem.  Murray International Holdings Ltd reported its results for the year ending 30 June 2010, and they showed that the financial disaster surrounding this company continues unabated.  Then we have the resumption of the First Tier Tribunal that will determine whether Rangers FC will even exist in a year’s time.  It was a very good time for a distraction.

This blog has been clear that it suspects that Craig Whyte is nothing more than a willing participant in an elaborate deception to distract Rangers fans and the Laptop Loyal from these events.  Others tell me that Whyte really is  trying to line up financing for a deal.  Whatever his motivations, the story still has major credibility problems.  No one in their right mind would pay anything approaching the amounts quoted for a business that has a £54m tax bill hanging over it.  ‘Where is the fire?’  Why does Whyte want to move now?  Anyone serious about owning Rangers will simply wait a  matter of weeks until the result of the tax case is known.  Yet the Scottish media, from the taxpayer-funded BBC Scotland to those whose homes have been built on succulent lamb, continue to toe the party line like they worked for Pravda.

When Rangers fans’ anger eventually explodes and they search for culprits, I hope that they direct their fury in the correct direction: Rangers’ directors over the last ten years and the compliant Scottish media who have repeated lie after lie as news.

How much would you pay for Rangers?

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:

m
 £       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
 £     176m

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?

Rangers Knew About Other Tax Bill

On 1 April, Rangers’ Chairman, Alastair Johnston, presented his club’s Interim Results for the six month period ending 31 December 2011.  A bit of a fuss followed his revelation that Rangers had taken a charge of £2.8m for a tax bill relating to a Discounted Options Scheme used to compensate players between 1999-2003.  This is a second, and entirely separate,  tax case from the much larger one related to Rangers’ use of Employee Benefits Trusts (EBTs).  This smaller bill has been seized by the creative PR staff spinning the on-going “takeover” saga involving Craig Whyte as a snag holding up a deal to sell the club.  However, it was Johnston’s claims that this bill “came out of left field” that struck me as strange.  So I did some digging.

If Johnston is claiming that no one at Rangers FC knew about this bill, he is either ignorant of the facts or is deliberately misleading his shareholders.  It is possible that Johnston and other board members did not know about this bill, but my research reveals that staff at Rangers FC have been aware of this issue for at least two years.  Contrary to speculation, this issue was not discovered during Craig Whyte’s (or anyone else’s) due diligence.  Back-office staff at Rangers have been corresponding with HMRC on the matter for all of this time, and cannot claim that this was any kind of surprise.  After many months of discussion and correspondence, HMRC finally sent an assessment in recent weeks.

If Alastair Johnston’s claims of executive surprise are true, it is indicative of an organizational and leadership vacuum at the club.  Certainly, Martin Bain, as Chief Executive charged with day-to-day management of the business, should have been fully aware of this issue.  If a “shoot-the-messenger” culture exists that lead accounting staff at Rangers to hide potentially bad news from the Chief Executive, the club is in worse shape than anyone thought.  A picture seems to be emerging of a dysfunctional organization that rarely misses an opportunity to do the wrong thing.

This would all appear to be a hangover from the reign of Sir David Murray.  It is a familiar issue for companies where an overbearing ego casts a long shadow.  Organizational design, delegation of authority, and a common understanding of business ethics are sacrificed to feed Mammon.  In such companies, strong middle managers do not develop or they are passed-over for more the more compliant.  When the cult of personality fades or is extracted, there is no corporate culture to fall back upon.  Either Rangers has become such a troubled company, or Alastair Johnston is mistaken when he claims that no one knew that this issue was brewing.  If Martin Bain knew but did not inform the board of developing risks, it would reveal the extent to which Rangers have become distracted by internal feuding and ownership issues.

The obvious next question: Are there any more tax issues?
I have been told of a few issues bubbling under. It should not surprise us that more issues exist. Once you ‘cross the Rubicon’ and embark upon what is, at best, a high risk taxation strategy, your door will be open to every snake-oil selling law firm with a plan.  Other schemes in which it has been claimed that Rangers have participated over the last decade include one to award share warrants in cash-rich offshore companies to staff and to make use of  film partnerships.  (Coincidentally, this last scheme was apparently used to compensate a former Rangers manager who bears a startling resemblance to the actor David Caruso).

Whether investigations into these other issues ever result in additional tax assessments remains to be seen.  Nevertheless, it is clear that when a revitalised Celtic started to apply pressure on Rangers in the late 1990s, Sir David Murray directed the club to chart a course which now imperils its very existence.