This AGM of Rangers International Football Club (RIFC) will take place this Friday in Glasgow.
I contacted the Rugger Guy to get his take on what the main financial issues might be.
This morning he sent me this:
Disapplication of Pre-emption rights.
Phil has asked me to explain what this means and what the implications are for RIFC and the shareholders.
In simple terms this special resolution, which requires the approval of 75% of shareholders, if passed, allows the directors of RIFC to issue shares to anyone they wish. Previously, any shares that were issued required to be offered to existing shareholders so that their holding would not be diluted. At present RIFC has 81 million shares issued. The proposal is for an issue of 108million shares. Last year the intention was to issue over 40million shares.
There are significant ramifications should this resolution be passed and can be dealt with under three main headings:
- What should the fair price for shares that are issued?
- In what way are shareholders rights protected?
- Could this result in a takeover of RIFC?
What should be the fair price for shares that are issued?
There are a variety of methods to value unquoted companies
- Generally, a company is valued on a multiple of its profits after tax. RIFC has not made a post-tax profit in its four-year history, so this is not appropriate.
- Small shareholdings can be valued on the basis of the company’s dividend stream. RIFC has not paid a dividend in its four-year history, so this is not appropriate.
- Alternatively, an asset-based valuation is a good “floor” to a company’s value. They are particularly useful for companies with low earnings and/or large asset portfolios.
RIFC acquired the fixed assets, Ibrox and Murray Park for £1.5m in 2012.They were revised upwards by £5m initially, and then the directors undertook a further revaluation of £34m. The directors also revalued the “brand” by £16m.
In my opinion, it is very difficult to apportion a fair value on these assets as there is a suggestion that significant monies are required in order to repair these fixed assets. In addition there are outstanding legal issues surrounding the “brand” and the retail revenue stream appears to be controlled by Mike Ashley, not RIFC. The other large Elephant in the room is the “going concern” risk. Putting all these factors together, coupled with the £13m debt, I concluded in my last report that the equity value of shares was very low indeed. The shares have been trading on a matched basis at 27p. In my opinion, this price is significantly higher than the fair value of these shares.
In what way are shareholders rights protected?
Companies’ law legislation suggests the following:
The level of dilution of value and control for existing shareholders. Companies should aim to ensure that they are raising capital on the best possible terms in order to avoid unnecessary dilution of existing shareholders, particularly where the proposed issue is in the context of a possible rise in the share price. Any discount at which equity is issued for cash other than to existing shareholders will be a concern.
The proposed process following approval. Companies should make clear the process they would follow if approval for a non-pre-emptive issue were to be granted, for example how dialogue with shareholders would be carried out in the period leading up to the announcement of an issue.
As RIFC is no longer quoted on the Alternative Investment market, the dialogue does not need a prospectus, which amongst other things includes a working capital report. A working capital report effectively needs the reporting accountants to sign off that the company, post issue of shares can continue to trade for the next 12 months. This is far more reassuring in that the auditors are expressing view on the director’s considerations in the annual accounts. However, where there is a prospectus and the auditors sign off a working capital report, then the onus relies on directors and the auditors.
Could this result in a takeover of RIFC?
In a nutshell, yes.
At present Messrs King (through New Oasis), Taylor, Park, and Letham owns 24% of the shares in RIFC. In the event that concert parties own more than 29.9% of a company then they are obligated to make an offer for the whole of the issued capital of that company. A waiver could be granted in exceptional circumstances. A number of the parties listed above have outstanding loans, and if they are converted to equity, depending on the price, then it is likely that more than 29.9% of the equity will be owned. Clearly, it is very advantageous to new shareholders, or owners of debt (which will be converted to equity), to have an issue price which is as low as possible. An independent accountant’s valuation of the shares would be useful in this regard, and as RIFC is no longer listed, one of the big four accountancy firms would be recognised as providing the correct level of comfort in this regard.
In summary, it is very difficult to arrive at an accurate, fair value for the shares. The delisting of RIFC reduces significantly the disclosure requirements and consequently information given to shareholders. Approval of the resolution means that no public documents such as a prospectus will be issued. It saves on the cost but potentially reduces dramatically the comfort that can be given to shareholders.The shareholders should consider that the vote on this resolution could potentially trigger a takeover of RIFC. Consequently, the fair value of shares is critical.
Ok, usual Rugger Guy rules apply. Those are his words, not mine.
After receiving the mail, I called him and asked him to take me through it, but gently.
The first thing he said was that anyone who had bought into RIFC at the start and still held shares had not made a good financial move.
The shares started at £0.70 in December 2012.
However, I then reminded him that the shareholders were lucky indeed to have a Chairman like Mr David Cunningham King looking after their best interests.
And then he laughed.
For the avoidance of doubt dear reader, I joined in the mirth.
I’m sure General Ashley would get the joke too.
He hasn’t gone away you know.