Sweltered wrote:I suspect that mr Whyte will have siphoned off several million already. Not bad for a 1 pound investment
rangerstaxcase wrote: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 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 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 both a secured and preferred 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.
Rangers’ fans should be thanking their pantheon of heroes from the past that Craig Whyte is the owner of their club. As a “keen Rangers fan” Whyte will, no doubt, act with a mixture of emotion and the business acumen that has seen him amass such a fortune for a man just turned forty.
Celtic fans had better get used to the sounds of celebration coming from Ibrox. Mr. Whyte means business.
It could, of course, have been easily so different for the Ibrox club.
Had Rangers been taken over by someone who just saw the financial opportunities of a distressed company, rich with under-productive assets and a loyal customer base, the club would have been vulnerable.
The following scenario COULD have happened had someone else, an asset stripper, taken over Rangers.
Buying the company for one pound he could have also purchased Rangers debt from the bank.
Once in charge, an asset stripper intent on squeezing the most profit from his investment could then try to securitise revenue streams.
He might try to borrow money against future season ticket sales, say, for the next four years.
Securitising £40 million of future season book income would allow the club to receive about £30 million in cash now.
An owner like Mr. Whyte, who has Rangers best interests at heart, would use that money to either invest in players or to pay any tax bills that crystallise in the future. Had someone else bought Rangers and securitised future season ticket money, he might feel tempted to just pocket that cash for himself.
That sounds like a scam to most, but it is usually perfectly legal. This hypothetical other owner could have forced Rangers to lend that £30 million in cash to its new parent company.
The parent company would be then free to use that borrowed money as they saw fit, such as paying all of it as a dividend to its own shareholder(s). If the club was then to become insolvent, an administrator would try to pursue the parent company for the repayment of the loan. However the parent company would have no cash to repay the loan after paying the dividend. It would then have to file for bankruptcy too.
The loan from Rangers to its parent company simply could not be repaid.
In this entirely hypothetical and fictional scenario, the Rangers season ticket money would be in an off shore account supporting a billionaire lifestyle.
Fortunately for Rangers this could not happen with Craig Whyte and the club's own new parent company. Mr. Whyte's circular yesterday included a pledge that Rangers' parent company would only borrow from the club if it was "principally for the Club's benefit". The penalty for breaking this pledge is that Rangers' £18m debt to its parent company would be cleared. A different owner might have seen an opportunity to pocket £30m cash in return for giving up his right to get £18m repaid. A different owner, if he was exceptionally greedy, might pocket the £30m cash and then try to argue that the loan to the parent company was "principally for the Club's benefit" or might have had his legal team insert a loophole in the documents that rendered "the pledge" null and void. He would then also be able to demand the first £18m from the sale of the club's assets in administration.
Rangers FC and its many supporters can consider themselves very lucky. In their vulnerable state, they were delivered to an owner who is both a shrewd businessman and a “keen Rangers supporter”, Craig Whyte.
It would be churlish to not acknowledge the good fortune of the blue half of Glasgow.
There is now truly light at the end of their dark financial tunnel.
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