09 January 2015

Rangers Retail - The Uncomfortable Truth

by Iain Nicol and Ross EJ Hendry | Guest Contributors 

As with almost every aspect of the ongoing Rangers saga (WHEN WILL IT END? PLEASE LET IT END!) there has been copious amounts of scrutiny and conjecture levelled at the joint venture between Sports Direct and RFCL - known as Rangers Retail.

Interestingly enough this was one of the first orders of business that Charles Green and his team put in place. The two parties entered into the agreement just 47 days after Green acquired control of the football club. It is incredible that major decisions on such an integral part of the Club's financial future were being taken in such short order. 

Of course, Charles had a severe bout of Rangersitis at that point. And, it is reasonable to assume that Mr Ashley was made a promise in return for his taking an initial three million shares and 8.98 per cent stake in RFCL. Incredible, because there is simply no way that; one - this deal is a good one for Rangers and two - this was the only option the Club had. 

Let's be honest, in order to decipher the Rangers Retail joint venture you would need to have been in the room with Green and Ashley when the agreement was struck. Then you would have to be in their respective offices when they told their own teams what their real plans were. Once you had seen all sides you'd have to apply a 'Rangers lens' to things and interpret it from that sight line. Because, apparently, nobody cared what the long term benefit to Rangers was when this deal was agreed. Temporal displacement is about as likely as trust at this point so we are left to patchwork together a view of the deal.

The latest part of the agreement to be scrutinised online is the passage below after it was tweeted by the Rangers Supporters Trust Twitter account on Wednesday evening. The said passage comes from part XIII, section 12.1.3 of the RIFC prospectus. It is heavy on the legal jargon in places. But, we can glean a couple of key points that should make anyone with Rangers' best interests at heart at least slightly uncomfortable. 

What the above paragraph tells us is that Sports Direct have the authority to acquire the entirety of our shareholding in Rangers Retail Limited for a prescribed amount in the event of there being no resolution in a deadlock matter between Rangers and Sports Direct. A deadlock matter usually arises when two parties entering a joint venture i.e. Rangers Retail cannot agree on the interpretation of a guiding principle in the agreement or running of the business. Such a clause will usually be invoked after third party mediation has failed. The amount in question is 50 per cent of Rangers Retail's profits for the past 12 months – or, in our case (RFCL), the equivalent of one year's net income from our retail operation.

In year one of Rangers Retail, 50 per cent of Rangers Retail's profit equalled £217,000. That's predominately down to the JJB deal and when the Rangers Retail deal began. In the last year, we can't know for sure of the profit from Rangers Retail until we see their accounts released early next month, but using the first year accounts as rough guide we can make some very rough estimates (these estimates will be on the high side, given costs likely incurred in opening new stores which will probably be shown in the next set of RR accounts). 

In the last year, 50 per cent of Rangers Retail's profit amounted to less than £817,000. If, hypothetically, Sports Direct contrived a deadlock situation, they could buy out our side of the retail contract for the above amount. This deadlock provision benefiting one side also gives an insight to the power dynamics of Rangers Retail, for example;

Rangers Director: “We do not agree with X.”

SD Director: “Oh really? Well if you don't agree with it we'll simply buy your side out...”

Rangers Director: *slopes off with tail between legs after agreeing to X*

This, in addition to the fact Sports Direct hold superiority in terms of share class and their powers (see below) makes for frightening reading. We (Rangers) do not hold the power over OUR own brand. That has been given up. And, it puts paid to the fanciful notion of being a global brand that seems to predominate on the Internet.

So, what would it actually mean for Rangers if Sports Direct bought out Rangers Retail? Well, firstly we can expect a depremiumisation of the Rangers brand. Essentially we would be subjected to merchandise such as the disgusting League Cup semi-final commemorative t-shirt. The production of which highlights exactly the issue with Sports Direct having control over our retail division. Such items would become the norm under any buyout as Sports Direct are unashamedly a 'stack 'em high, watch 'em fly' discount-led retailer.

Secondly, Sports Direct would become our exclusive supplier and distributor of merchandise. Under the terms of which we'd have to pay Sports Direct “cost”, plus 10 per cent, for any branded merchandise supplied to us.

Sports Direct would have the authority to sell our merchandise in their stores or sell it on to whoever else they liked at whatever cost they liked. Which means it would likely be cheaper to buy a Rangers item from Sports Direct than it would be to buy from Rangers direct. Why would Sports Direct position their unit selling price any other way? Rangers would then be paid a royalty for merchandise sold by Sports Direct. What this royalty would look like cannot be reasonably guessed at. But, we can rest assured that it would at the very least fall slightly favourable to Sports Direct.

So, what are our options from here? It is extremely hard to say at this point and it would be irresponsible to speculate given that those vying for the Club are (presumably) in the middle of negotiations. What we can state is; that as the Douglas Park, Dave King and Ashley groups negotiate a potential solution that particular effort is applied to reaching a more equitable agreement in the Rangers Retail joint venture. 

In order to restore Rangers to robust health the Club requires as much of its own revenue as possible and it needs its merchandise arm to work harder for the Club than it ever has before. It also requires a fully motivated fan base ready to back club partners such as Sports Direct. Both parties can benefit from each other if both sides can agree to hit the reset button and build something together and for the long term. 

This is not an easy fix but it can be a mutually lucrative one.