11 December 2012

The IPO – is it a fair share? Are the questions answered?

By Peter Ewart | CRO Contributor

A while ago I put some questions out there regarding the upcoming share issue. Now, with the prospectus issued, I'll try to lend a few answers.

And please note, this isn’t financial advice, or advice of any sort. It’s some thoughts on what jumped out of the prospectus for me. You can download the prospectus and application details at www.rangersshareoffer.com.

So what is on offer?

Shares are available in a new company created on 19 November 2012, Rangers International Football Club plc. Up to 72m shares will be listed on AIM.

There are Offer shares, which are open to us fans; Placing shares which are being placed with institutional investors (investment funds and the like); and Acquisition Shares which will be issued to existing shareholders in Rangers Football Club Limited (Green, Ahmed, Blue Pitch etc) in exchange for the shares they hold at the minute. RFCL will be a 100% subsidiary of Rangers International Football Club plc.

If all placing and offer shares are sold (at 70 pence each) the split of ownership would look like this:

Offer shares – 19.9%
Placing shares – 33.7%
Acquisition shares – 46.4%

What financial state is the club currently in?

Income statement

The prospectus sets out trading information for the three months to 31 August 2012. This is about all they could do, but is not very representative of where we are now. At that time we'd only had the East Stirlingshire SFL3 league game, and the East Fife and Falkirk League Cup games at home. There was a £3.8m operating loss in that period, but a write back of £17m associated with goodwill that was obtained for nothing when Green & Co bought the club turns into a near £13m profit. That is a one-off and therefore won’t be repeated.

In short, it’s difficult to unpick all that is going on in those three months and only three home games in that time. The important bit will be to ensure we run at an operating profit over the course of a full year, given current wages and conditions, and we won’t know that until we see it. The Prospectus includes a statement that the Directors expect the club to be profitable and a self-sustaining organisation, which is hardly a surprise.

Balance sheet

This lists the assets and liabilities of the company at 31 August 2012. In total it shows a net book value (total assets less total liabilities) of £47.8m. That is rather different to the £5.5m Green & Co paid for the club’s assets. Why?

There are two major reasons: First, Ibrox and Murray Park are now valued at £43.5m rather than the £1.5m in the purchase agreement. This is on a discounted cashflow basis as agreed by the directors using a 12.25% discount rate. The £80m valuation, quoted in the press, is the depreciated replacement cost. This is separate and is not a balance sheet item.

And net £16m of goodwill (the brand) is now being recognised on the balance sheet. Add in a few other smaller assets and liabilities and the net position is £47.8m.

What has been done or will be done with the season-ticket money which should be used to cover the running costs? What is the current cash balance held by the club?

There was a cash balance of £4.1m at 31 August 2012. Some cash will have gone to running costs and not all season ticket cash would have been collected by the end of August due to the Direct Debit scheme. Elsewhere in the document it tells us over 35k season tickets were sold by 31 August at an average of £219 bringing in around £7.78m in season ticket sales. In addition to this a further £5.575m has been invested by new shareholders after 31 August.

How much has Green’s consortium put into the club? Looks to be £9.5m plus £5.575m after the 31 August 2012 from new shareholders (prior to the IPO).

How much of the £5.5m paid for the club has been turned into a shareholder debt repayable by the club? None.

Has any more capital been injected into the club in the form of loans? No

We can't spend it on buying/registering senior players prior to 1 January 2014, so why a share issue to fans now? Or, to put it another way: If you handed Charles Green £500+ to spend for the club what would you want him to do with it?

If the IPO is fully taken up should raise a net £24.5m for the Club. A summary is laid out for how it is intended to be spent:

£5.5m for Ibrox upgrades.
£4.5m to purchase land assets adjacent to Ibrox.
£3m for other projects that would bring additional revenue streams and working capital (no figure given).

If enough is raised a further £3.5m would be spent on Ibrox and £2m on other projects. So that would account for £18.5m of £24.5m.

There isn’t a lot of detail on the projects but it would appear the moving the shop to Edmiston House would take place, with the ticket office moving to the existing Megastore. Upgrades to catering and bar facilities within the ground would be among the projects identified.

What are the consequences if the IPO does not attract sufficient interest? Is it being underwritten?

The IPO is not being underwritten. It is stated that Cenkos Securities have signed up £17m in placing shares from institutions, but this has not yet been received although it is likely to be. Names like Artemis, Legal & General, Insight Investment, Hargreave Hale and Cazenove are included in the prospectus as purchasing Placing Shares.

As regards the Offer shares if we don’t buy the shares, again it is not underwritten. It would mean the additional upgrades to Ibrox and other additional projects would be unlikely to go ahead.

Valuation

To put it in Dragons’ Den terms, the fans are being asked for £10m for just under 20% of the company, which values the club at just over £50m. A long way from the £5.5m paid for the assets. Of course the future of the club is a little clearer now than it was then. Still, it’s quite a hefty amount for where we are currently.

On the other hand, there are household names from the investment industry that are taking shares at the same price, so they must see an attraction. Once the shares actually start trading they could of course move up or down in price. If there are more sellers than buyers, the price goes down and you get more shares for your money than through the IPO (a prize for stating the obvious) and vice-versa.

The prospectus identifies ‘Locked-in Shareholders’ i.e. Directors and key staff who wont be able to sell for 12 months and some institutions have agreed not to sell for six months and to contact Cenkos so that orderly trading can be achieved. But don’t necessarily expect other investors to be around for long if there is a gain to be had. Once the shares are trading, there is no available mechanism to ensure that no shareholder owns no more than 10 or 15%. Shares could be bought on the open market and at certain levels, the City Code (regarding takeovers) would kick in.

Other points

  • Green already owns 15% of shares in the company (likely to be diluted down to around 7-8%) and he paid £50k for them.
  • Super already owns 2.99%!
  • Two new non-executive directors have been appointed.
  • Lots of risks/uncertainties highlighted re: future prospects.
  • Prospectus makes mention of trying to get back to the SPL by season 2015-16 although reconstruction may accelerate this.
  • Football performance/success has obvious link to parts of the value of the shares.

Statement re: the liquidators and creditors of RFC 2012 plc (OldCo): Although it acted in good faith, RFCL ‘cannot be certain that a liquidator or a creditor of RFC 2012 plc would not seek to try to establish grounds under the provisions of the Insolvency Act 1986 to challenge the acts of the administrators of RFC 2012 plc, the Directors consider that all necessary steps have been taken to ensure historic liabilities of RFC 2012 plc remain with RFC 2012 plc and that the APA is valid, binding and enforceable.’

Purchase agreement bought lease to Albion Car Park which RCFL is now trying to buy out for £1.5m. RFCL own 51% of the Retail JV with Mike Ashley’s Sports Direct. The Sport Direct group has agreed a £1.5m borrowing facility with the JV that if taken up would see debentures secured in Sports Direct's favour against the (presumably new) Megastore.

So in conclusion it’s difficult to assess the financial position right now at December 2012 from only three months figures to August, but we know broadly where the IPO money would be spent – on the ground and surrounding Ibrox and on projects that would (we hope) open additional revenue streams. The valuation is pretty steep, in fact it’s my biggest hang-up with all of this. Are we worth £50m here and now? Strikes me that the fans are being asked to pay a premium AND take the risks with it. Particularly given the price of the shares could be volatile.

The choice is yours: £500 minimum as an individual or as an alternative you might consider £125 via the RST. Some fans like the idea, some don’t; have a look at www.buyrangers.org and see for yourself. Or sit it out and wait for the shares to start trading to see what happens to the price.

I’ve tried to answer a few of the questions a few weeks ago. And I know for some the financial ins and outs of it won’t really matter - it’s a chance to buy a piece of Rangers. But I don’t see it as a cheap price. Ultimately do you trust Charles Green and the Board to do the right thing?

There isn’t a great deal else to go on. To me, this is what you would class as a punt.