Rangers Cash Flow: A Huge Problem
26/10/2011 1,456 Comments
Following on from my previous post, I am enclosing a screen capture of Rangers cash flow projections for the current season. It provides a numerical insight into the scale of the problem facing Craig Whyte’s Rangers.
Before we wade waist deep in numbers, I should explain that the data has been anonymised. By this, I mean that all of the numbers have been adjusted slightly. However, the net effect of the adjustments on the totals is negligible. The original raw data was much more granular and more easily verified. At the request of the source, some values have been aggregated.
The first point to observe (for those who are unfamiliar with cash flow projections), is that this sheet starts with the 2010/2011 season ‘Actual’ cash flow values as a baseline. The rest of the numbers represent increases or decreases in cash flow compared with the same period in the previous season.
Next, we should note that Mr. Whyte has some degree of flexibility over when bills are actually paid. This means that this analysis has an accuracy of approximately of plus or minus one month. Additionally, there is currently no evidence of Craig Whyte having made good on the pledges made in the takeover documents to invest cash. Therefore, I have not shown any investment in working capital from Rangers’ majority owner.
Without Whyte’s investment, the spreadsheet shows that Rangers could survive through the October pay period and hitting a brick wall by the end of November. However, this could also be interpreted as projecting Rangers filing for insolvency before the end of October. (Rangers fans will be hoping that cash can be stretched out until the end of December when the opening of the transfer window would hold out hope of liquidating assets to extend the life of The Rangers Football Club plc. I am told that this is highly unlikely.) Values are in £ 000’s.
Of course, if Whyte has recently made good on his promises of working capital investment, Rangers can breathe for a while longer, but it would be unlikely to even cover the next month’s cash requirements. To survive to February or March 2012 when the First Tier Tribunal can be expected to return with its findings in “The Big Tax Case”, Whyte would have to invest close to £15m to keep Rangers going.
So where is the investment from Whyte’s “Wavetower”? (“Wavetower” is now more formally called The Rangers FC Group Ltd and Whyte claims that he owns it 100%). The takeover documents do provide a watertight promise of investment. If insolvency is inevitable, the smart move for Whyte is simply to pay off the obligation to a receiver rather than to Rangers prior to insolvency. If Whyte opts for receivership (and if he defeats any legal challenges to his appointment of a receiver), he will get all of that payment back less expenses. (As regular readers of this blog will know well, a receiver acts solely to recover the debt owed to the holder of a ‘floating charge’. In buying Rangers’ debt to Lloyds, Whyte has acquired this legal privilege of priority repayment above everyone else except recipients of statutory payments. Only once the secured creditors are paid in full would other creditors receive anything). So, rather than seeing his money consumed by “old Rangers”, Whyte is able to keep his powder dry while satisfying his legal obligations too late to do the current company any good. (Viewers of Mark Daly’s recent BBC Scotland documentary on Whyte’s business history will feel a sense of deja-vu). Alternatively, Whyte might be more benevolent than many believe and he may choose to pour in cash until the tax tribunal returns a result. That would indeed be a surprise. This would take his investment in Rangers up to a figure of about £33m. The prospect of a return on his investment would disappear at such a figure. Basically, Rangers’ failure to qualify for the Champions’ League scuppered any sensible prospect that Rangers could survive to face down HMRC in “the big case”. Only a substantial cash injection now will prevent insolvency in the coming weeks.
On the subject of return on investment, quite how Whyte plans to turn a profit on Rangers has mystified informed observers of all hues. Noting that the bubble in Scottish football has long since collapsed and our game is fully decoupled from the continuing financial madness of the English Premier League, anyone making an investment in a Scottish club must value the business based upon the free cash flows (money available to be withdrawn by shareholders). There are two major ways for Whyte to handle Rangers. Either he liquidates assets and destroys the football club in the process or he runs the club as a going concern and tries to find a buyer (or pockets an annual dividend). Whyte has had ample opportunity to liquidate Rangers and make a quick profit. He has not done so. We are now left with the going concern option.
Let us look at how Rangers would be valued as a going concern. Sparing you the details of asset valuation theory, if an owner expected to withdraw £1 million for himself from a business each year, he might pay £10-12 million today. (This is very reasonable for a high risk business in today’s low interest rate environment). Leaving aside the idea that supporters would tolerate any owner withdrawing £1 million per year for himself, if the future sale value of The New Rangers as a going concern is at most £12 million (i.e. the most a rational buyer would pay), how does Whyte plan to turn a profit having paid £18 million for Rangers’ debt?
What sort of lender would give Whyte £18m for such a high-risk investment while expecting no more than £10-12 million in return? No one else would touch Rangers. What did Whyte see that no one else did?