The True Horror of Glazer Take over

[mthead]

Just read this on shareholers united web site it is a total horror story for me personally anyway.
Finance structure

Glazer plans to finance the acquisition of Manchester United as follows:

• £272 million of his own money (all or most of which was borrowed from Commerzbank we hear)
• £275 million of ‘Preferred Securities’ issued to various Hedge Funds by Red Football Ltd (Red). These ‘Prefs’ are basically debt in another form, a type of share which has no vote but a fixed financial return and which are not (initially) secured on the assets of the club. Red has the right to redeem these Prefs at any time, which is likely to happen within 6 months of closing of the offer as they are very expensive to maintain (see below). The redemption value increases hugely as time goes by. Red must also pay a redemption premium to the holders, the Hedge Funds – estimated amount £50 million – we will confirm this when the finance agreements have been inspected). The finance to redeem these Prefs will most likely be secured on the assets of United, ranking in priority behind the Senior Debt (it will probably be classed as ‘Junior Debt’, as it bears more risk than the Senior Debt and will therefore carry a higher interest rate). Glazer does not confirm that this redemption will occur or mention the Junior Debt in his Offer Document, because he does not have to – it will take place after Closing.
• £283.9 million of “Senior Debt” secured on the assets of United. This debt can be drawn down in 5 tranches, bearing different interest rates and maturity dates (some of this debt will go to pay the estimated £50 million + of banking and advisory fees payable by Glazer on this transaction and which will be borne by United)
• £90 million of working capital and capital expenditure facilities – these facilities were not mentioned in the RNS summary offer statement of last week

Total acquisition cost = £920.9 million

Total debt incurred by Glazer’s companies which could (and probably will) be leveraged on the assets of Manchester United = £648.9 million + the cost of the redemption premium on Prefs est. at £50 million = £698.9 million

Interest and Principal payments over first 5 years

Prefs – these incur rolled-up interest at average interest rate of 17%, totalling £48 million per year for 5 years, giving a redemption value after 5 years of £615 million. Rolled-up interest is not immediately payable, it accumulates and is added annually onto the redemption value of the Prefs.

Senior Debt – average interest rate over 5 tranches is £25 million p.a. for the first 5 years, plus a further est. £5 million on the working capital facilities. Add total capital repayments of £12.5 million p.a. for first 5 years, this makes:

£42.5 million per year total amounts payable by United on Senior Debt

Junior Debt (assuming refinancing of £275 million of Prefs + premium of £50 million - £325 million) – more expensive as more risky, so assume average interest rate of 10% p.a., and initial capital repayments of £10 million p.a., this makes:

£42.5 million per year total assumed payable by United on Junior Debt.

Total payments annually required to service the debt in Manchester United:

£85 million


Sale & Leaseback of Old Trafford

The only way Glazer can seriously reduce this level of debt quickly is by sale & leaseback of Old Trafford for an estimated £200 million cash payment into the club.

This would be used, we assume, to redeem the Prefs to replace part of the debt financing, so on this assumption, we can reduce the Junior Debt element in the above calculation to £85 million (£75 million + reduced redemption premium of £10 million). This brings the annual service cost of the Junior Debt, using the same bases as above, to:

£12.5 million +
£42.5 million (Senior Debt)

= £55 million p.a. still required to service the debts under the sale & leaseback scenario.



Conclusion

In order to complete his takeover of United, Malcolm Glazer has taken on 3 levels of debt.

1. Personal or family foundation debt.
To buy his original stake (up to 28.1%) Glazer used his own assets. Everything we know about him tells us that it is not his style to use his own money, and we have been told (on good authority) that the whole of that stake was acquired with borrowed money. Although he is not initially planning to leverage this debt - £272million - against the assets of Manchester United, we can assume that he will expect the borrowing to be repaid by the profits of the club.

2. Senior Debt secured on United’s assets
JP Morgan agreed to lend up to £540million to fund Glazer’s acquisition of the club. However this was contingent on him securing conditional acceptances of 75% of the share capital. Cubic refused to risk giving a conditional acceptance of his offer. They wanted the money up front. Without them he was unable to secure the 75% he needed to trigger the JP Morgan loan.

3. Preferred Securities as bridging finance
In order to buy out Cubic, Glazer was forced to fund the buyout with effectively a bridging loan. This was a very expensive way to fund the purchase of the Cubic stake and the rest of the shares he needed to reach the 75% that would allow him to take the club private and trigger the JP Morgan finance. He did this by issuing what are known as “preferred securities” in Red Football Ltd to various hedge funds. Preferred securities are a particular type of share which confer no voting rights in a company but which attract high interest and when are often secured on the assets of a company, in this case Glazer’s own shares.



At the moment Glazer is claiming in his offer document that the only debt which will immediately be transferred to Manchester United, on his taking the company private, is the £373.9 million to be lent by JP Morgan. This is because the plc Board rejected his first proposal as “over-leveraged”, so he put in place some “debt in drag”, the Preferred Securities. But the cost to him of these Prefs, with their rolled up interest at 17% p.a., is so horrendous that it would only make financial sense if he buys then back as quickly as possible. No sane lender would give him the necessary funds to refinance unless (i) they were paid very large fees for doing so or (ii) there were sufficient United assets left over after JP Morgan’s first priority security ranking. And this refinancing will be expensive too.

A better bet for him is to execute a sale & leaseback of Old Trafford as soon as possible. OT is the only unmonetised asset left at United. This would undoubtedly incur the wrath of all United fans across the world as selling the heritage of the club.

[cashman]

i think the heritage of the club was sold when it was put on the stock market,same as other clubs,sad fact- football is now a buisness more than a sport.its not run by sports lovers now its run by accountants,answerable to shareholders in my view,but as i have no love for united im not really bothered. lol

[Bazf]

I am sure that its a blow to all manure surpporters but in 1999 when you decided to become a plc Man utd shareholders were all for it and when you bought the likes of oh ar Cantonar you were not complaining in fact you were rubbing it in to everyone that it was the way to go and clubs like Liverpool and Arse were behind the times, well what you reap is what you sow, once you become a plc you are basicaly for sale and having the idea that no one would have the money to buy you was a very ostrich idea. Glazer has a personal fortune of over 1Billion $ and owns two other companys worth over $1.5B plus the Buccaneers which is valued at $750m and he started off with a watch repair company, so he knows business and he knows the sports business so I don't think he would buy a company worth $1b and run it in to the ground no matter what the rest of us want to happen. As for finance when you bought your house did you borrow money? of course and the mortgage company went off your past record and future earnings thats all he has done but if you belive the shareholders utd then all those companys don't know what there doing and when it all falls through the 3 banks and 3 trust funds will be bankrupt, if that is the case and everyone involved in this deal is as stupid in business as they say then I have just a couple of questions

1 Why didn't shareholders utd see this coming and prevent it
2 How can companys that deal in Billions daily be so stupid as to back it

To cheer up all manure fans you can go and see the cup you won in 1999 at Anfield rd Liverpool where it is on permanent display.

[cashman]

definately in the bazf camp on this one PMSL.

[yerself]

If he gets in your taxi ask to see the colour of his money before you set off mthead.