Options for Sevco after Resolution 11 defeat

In the aftermath of the Holding Company Vehicle’s glorious victory on Resolution 11, I asked my egg chasing buddy in the Square Mile to assess the options now for the Sevco High Command.

Here is what he sent me yesterday evening:

 

Following on from the recent AGM of Rangers International Football Club (RIFC) Phil has asked me to outline what are the various options following on from the failure of resolution 11.

 

The narrow failure of this vote and the consequent loss of flexibility which this could have provided to the board of directors leaves a big dilemma for RIFC. Despite the reassurances given in the recent set of accounts that the directors of RIFC and investors will continue to provide the necessary funding for at least the next twelve months, confirmed by Campbell Dallas, the auditors, it is my view that this situation cannot continue indefinitely, as this has only been a short-term solution in providing emergency working capital. RIFC requires substantial investment in its infrastructure, and as I understand it, the playing squad. Director’s loans, in isolation, are not capable of funding this requirement.

There are three alternative options over and above directors continuing to provide emergency funding.

1 Rights issue in accordance with resolution 10.

2. An administration /insolvency event.
3. Revisiting resolution 11 as soon as practicable.

 

Rights issue as approved at the AGM.

As RIFC is a public limited company, a rights issue will require a prospectus to be issued.

The good news for RIFC is that as the company is no longer quoted on The Alternative Investment Market exchange, consequently, the level of disclosure required is substantially lessened. Things such as an accountant’s report, a working capital report, a profit forecast, etc., are not required. However, a full listing of all the risks associated which require to be legally verified places a huge responsibility on the directors, lawyers, and accountants to ensure that all potential costs and liabilities are highlighted and not understated. A prospectus is not cheap. As an approximation, costs are normally between 6 to 8% of the gross proceeds. These costs need to be highlighted in the document. Resolution 10 allowed for a further 81million shares to be issued. I have written in the past about putting a value on the shares. This is very difficult to carry out accurately. I have highlighted issues which may be costly, such as legal costs regarding Sports direct, and stadium remedial costs, to mention a few. Also, it is important that in order to protect the minority shareholders who will be financing the issue, the price struck is not overly aggressive. A range of prices may be between 10p and say 14p, however, in order to do justice to arriving at a fair value per share, full access to a detailed evaluation of financial contingency items, management accounts, budgets and 5-year plans are needed. Gross proceeds raised could be somewhere between £8m and just over £11m.Prospectus costs could be anywhere from £0.5m to £1.1m.I am assuming that the directors would underwrite the issue and convert debt to equity for the proportion of the issue which is not taken up. However, it should be stressed that this option is not likely to provide a meaningful solution to a company which requires substantially more funds.

 

An administration/insolvency event.

This area is complicated, and there are issues about football rules, point deductions, etc. I am not sufficiently qualified to list, in a footballing context, the ramifications for an administration or insolvency event. What I can highlight is that the current financial situation is materially different to that of the insolvency four years ago.

Four years ago, there was a substantial amount owed to creditors by Rangers FC. As of today, RIFC has no credit facilities with a bank and consequently all funding, recently, has been provided by soft loans by directors. Before RIFC lost its listing, the monies were raised via issuing new shares. In the event of insolvency, all equity is wiped out, and director’s loans will also be written off. I am sure that the directors do not wish to lose the prospect of recovering on their soft loans. The big elephant in the room, however, is the costly contract with Sports Direct which appears to cost RIFC anywhere from £4m to £5m profit per annum. There are another six years left in this contract. The only way this contract can be terminated is via a successful court challenge or going into liquidation. As highlighted above the footballing consequence of insolvency are also very costly, as sponsorship, season ticket money and all other financial aspects of starting again are also very costly. An administration event does not solve the Sports Direct dilemma, so I do not envisage that this is a viable option.

 

Revisiting Resolution 11 as soon as possible.

The main positives for the board of directors of RIFC in the event that resolution  11  can be revisited as soon as practicable is that they and the “concert party” can take control of the company and steer it in whatever direction they wish. Shares can be issued to whatever party they wish. Debt can be converted to equity whenever they wish, and as long as there is a demand for the shares, further working capital can be provided without the need for the directors to provide soft loans. Technically, if the directors and concert parties (people who are aligned with, and work closely with the directors) own more than 29.9% of RIFC, then a bid for the company should be required. Waivers can be sought under special circumstances, e.g. avoiding insolvency event). Under these circumstances, in which there is a desire to take control of RIFC, it would be beneficial for the share price to be as low as possible, however fundamentally RIFC probably needs a cash injection of at least £50million, in order to repair Ibrox stadium, Auchenhowie, and the football squad. Assuming the shares are issued at 10p, and 81million shares are issues, this would imply a revised value of £16m for RIFC. Takeover premium in order to buy out the minority shareholders would need to be added, so a minimum of £20m would be required in the event of a takeover. In addition, in my opinion,  at least a further £50m would be required in order to “right size” the infrastructure of RIFC.

 

Conclusion.

 

The scrutiny, level of disclosure and legal verification required in a prospectus, together with the heavy cost associated with a rights issue makes this, in my opinion, an unappealing route for RIFC.

The provision of underwriting by directors will ensure that the rights issue can take place. However, if only 50% of the issue is taken up by investors, the proceeds after costs may bring in only £3.5m to £5m to the company. Remember that the recent accounts indicated that almost £4m was required to see out the season. An insolvency event will wipe out shareholders and debt owners with the only benefit being the removal of Sports Direct contract. In my opinion, the best  solution for the directors of RIFC  is to revisit resolution 11 as soon as practicable, (after ensuring that the vote will be successful), this will allow greater control, however I feel that the reality is that the can is being kicked down the road until a substantial fundamental refinancing  is carried out.

 

Ah, a “substantial fundamental refinancing”.

Now, there’s your problem right there….

I hope you found Rugger Guy’s analysis helpful because I know that I certainly do.

My sense of it is that he has now developed something of a morbid fascination in this basket case of a company.