STEALTH FINANCING – PART 2 – when it Shouts
In September / October 2022, the following was published on our LinkedIn sites:
We have two excellent examples to consider, Manchester United and the Edgars Group.
The potent force of Leveraged Finance …. like compound interest can be incredibly powerful. Depending on which side you are, it is either a cliff (a fiscal one) or you are a visionary, well done.
Edgars went over the cliff and as for Manchester United, the fans would not mind seeing the “new owners” go off a cliff or a “glacier.” Both takeovers of the respective “companies” were financed via Leveraged Financing. Which in theory and indeed if applied correctly makes business sense.
Like any form of financing, it enables you to purchase something that you would ordinarily not have been able to purchase. Or the cost of the financing is less than your required return on investment and you maximize your return by Financing the deal.
How can you be viewed as a visionary …. you are effectively getting the company that you are buying to pay you to take it over, by using its balance sheet and Cashflow to secure the financing. Yes, the bank provides the financing, however in most cases it is the acquired asset that carries the cost.
So far this sounds mostly like a great idea, leverage a deal to the extreme and you can increase the size of a business exponentially …. or destroy it just as quickly. Nothing comes for free or without risk and with greater power comes greater risk. You can get caught in a web of your own making, as can be seen in our two examples.
One can take a group like Edgars (South African clothing retailer), a solid business with great cashflow and then leverage the deal to death, weigh the group down with so much debt that no matter how strong its cashflow, it cannot service the debt …. best case scenario is a trainwreck, you destroy a well-known brand and cost thousands their jobs, worst case scenario you destroy both companies involved in the deal and cost everyone their jobs.
What looked like free financing …. was rather costly, that Something that you were going to get for Nothing is now worth Nothing.
Edgars even factored in another form of financing, by factoring * their debtors ( /securitization – they tried everything), they were a leader in the initial blurring of retail stores becoming financial institutions. Perhaps they should have cut their coat according to their cloth and stuck to selling clothes. Regardless, it was the original heavily leveraged Finance deal that was the end of Edgars …. and if not the end, a once solid company was brought to its knees and was left a shadow of its former self, facing Business Rescue and a long road to recovery.
Now for Manchester United, well this is a double whammy …. sport is being mixed with business, which makes it a complex and emotive issue.
Yes, sport has been big business for a number of decades, the lines between sport and business are becoming increasingly blurred. We even have a new term, “sports washing” whereby countries or individuals hide behind the popularity of a sport, then there is the potential for money laundering, the transactions and values running through the large sporting codes is obscene and let us not forget sports betting.
Given the power of sport it is no surprise that there are those that wish to abuse that power, so what makes the Manchester United buyout even harder to stomach …. Leveraged Finance.
Eyes glazed over as their club was used to buy itself and “take it away” from the fans. It may have already been a “company” and listed …. it remains by its nature a sporting club and the fans play a central part in its value. Whilst listed, fans could even own a portion of the club until it was delisted after the buyout.
The millions generated by the club could have been spent on buying players or finding a new coach (quite frankly finding a replacement for Sir Alex Ferguson, is something that money cannot buy, not even with a certain card, he has proven to be priceless), instead millions were spent on paying the debt and its related costs.
Now Manchester United are still going strong in spite of their performance on the pitch, however that has more to do with the fans, the intangible value of the brand and the power of sport. The performance on the pitch and in the boardroom would have bankrupted other companies. Any improvements have been glacially slow and melted away far quicker. The passion and power of sport …. that invisible force keeps them going.
Points to consider:
Financing can be silent or very loud, rather be quiet and gracious about your victories. Hope that your failures are not loudly celebrated, by your detractors.
No matter the health of a business and its cashflow, financing costs and repayments can first slowly and then very quickly destroy a business.
Be incredibly careful when mixing sport and business, any failure will be amplified.
Financing is a high reward, high risk exercise, not to be taken lightly and it is not a once off exercise. The health of your business must be reassessed on a continuous basis.
If you over leverage your finances, over gear your Balance Sheet and abuse your Cashflow, you are “Whacking” your business, not improving your WACC (Weighted Average Cost of Capital) …. Capital that you cannot be afford cannot be weighted …. it is priceless, just not in a good way.
* Factoring your debtors is a sure-fire way to cut your margins and can be a sign of a distressed business. It could be used as a once off last resort or build it into your business model …. just ask yourself why? Be aware that Factoring your Debtors has many factors and costs. It must be viewed with extreme caution and may be a warning sign of a train coming down the tunnel, if it hasn’t already arrived.
Subsequently,
After the original article was published …. as at 19/02/2023:
A very public sale is playing itself out and at times quite dramatically in the media (i.e. a certain football star’s interview, which laid bare the lack of investment in the club itself over the past decade), the Glazers are looking to sell Manchester United (Or are they? Are they just testing the market?). They are looking for a selling price of around 6 Billion Pounds, speculation has bids ranging from 4 to 5 Billion Pounds. Quite a return on a purchase price of +- 800 million Pounds to purchase the club. The original purchase price of around 800 million Pounds ** was heavily financed as noted in the above article and the modern day encyclopedia ** “Wikipedia”. The original financing may have been in the region of 500 million Pounds. 300 million to make 4 to 6 billion, is a seriously impressive return and that’s in “hard currency”.
Now financing is a powerful tool in business and can result in some quite brilliant successes and breathtaking returns, if managed correctly and prudently. However as noted mixing sport and business (or politics with “Sports Washing”) … maybe the Glazers have no issue being massively unpopular (with these stakes you’ll either be famous or infamous) in England and with soccer fans, it is after all “only” business. Have they done anything wrong or have they just been really clever …. is it just “good business”, sports is of course massive business today.
Regardless it does leave a bitter taste, letting fans have a piece of ownership would make these mega deals and the blurring of sports and business, slightly more palatable. Perhaps if they’d invested heavily in the club and facilities over the years, they wouldn’t be so unpopular and the value of the club might have been even higher. Numerous studies show that business conducted in a Just and Ethical manner is better business, the emphasis in this case being on acting in a Just manner to all stakeholders. The relentless pursuit of profits at any cost, at some point, Ethics will be compromised and at that point the True cost of Financing will be felt.
** https://en.wikipedia.org/wiki/Glazer_ownership_of_Manchester_United ,
“A few days later, he took control of 75% of the club’s shares, allowing him to delist the company from the London Stock Exchange, and within a month, the Glazers took 98% ownership of the club via their Red Football parent company, forcing a squeeze-out of the remaining 2%. The final purchase price of the club totalled almost £800 million.
Most of the capital used by Glazer to purchase Manchester United came in the form of loans, the majority of which were secured against the club’s assets, incurring interest payments of over £60 million per annum. The remainder came in the form of PIK loans (payment in kind loans), which were later sold to hedge funds. Manchester United was not liable for the PIKs, which were held by Red Football Joint Venture and were secured on that company’s shares in Red Football (and thus the club). The interest on the PIKs rolled up at 14.25% per annum. Despite this, the Glazers did not pay down any of the PIK loans in the first five years they owned the club. In January 2010, the club carried out a successful £500 million bond issue, and by March 2010, the PIKs stood at around £207 million.”
#thecrazyaccountant #root4plant #MANU #E&OE
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