Through twitter and e mail I have received a number of requests to try and explain and/or comment on the Arsenal takeover deal.
Here is my best attempt to put the deal and possible ramifications into layman’s language.
Some people like Mondays
After agreeing to purchase the shares owned by Lady Nina Bracewell-Smith and Danny Fiszman, American Stan Kroenke became the majority owner of the Arsenal Football Club.
Prior to these deals being consummated there was no majority owner of Arsenal shares. Kroenke had steadily increased his holding to a point slightly under the critical threshold of 30%.
Another foreigner Alisher Usmanov, had also steadily increased the number of shares under his control and currently holds 26%.
Lady Bracewell-Smith had put her shares in play some time ago and Danny Fiszman is said to be in very poor health. If Kroenke had not moved to buy the two blocks of shares the opportunity to buy the club may have disappeared for ever.
Conversely the available shares may have then offered Usmanov a chance to seize majority control. One other scenario would have been the emergence of another interested party who could have staked a claim.
The implementation of the UEFA Financial Fair Play Regulations – although not critical – may also have encouraged Kroenke to seal the deal. Businessmen investing millions of dollars like certainty and the FFP regulations will provide much more certainty than we have ever seen before in European soccer.
Thirty (30) % is a critical point in terms of share ownership under Stock Exchange regulations. When such a point is reached an offer must be made to all the other shareholders to buy their shares.
Based on the acquisition of Bracewell-Smith and Fiszman’s shares Kroenke will now own a little less than 63% of the Arsenal shares. That means he must now offer to buy all the other shares of the club. This is not option – he must do this.
However, the remaining shareholders do not have to sell to Kroenke unless another threshold is reached. If Kroenke takes ownership of 90% of the shares then the other 10% are obliged under Stock Exchange regulations to sell to him.
Kroenke could also take steps to de-list the shares from the stock exchange if he hits a mark of 75% (as did the Glazer family at Manchester United) but his representatives have indicated that this will not happen at this time.
However, do not be surprised if this happens down the road. Maintaining a stock market listing can be arduous and costly.
Alisher Usmanov will still have his health
Usmanov is out of moves and now has a very simple decision. To sell his shares to Kroenke and take his profit and leave. The other is to stay on as a minority owner.
The problem with the latter option is that Usmanov will have money tied up in Arsenal shares but as a minority owner he will have little or no say in the running of the club.
That scenario does not sit well with billionaires so do not be surprised if Usmanov takes his money and waddles into the sunset – even though he may make other noises before acknowledging defeat.
Follow the money
The present owners of share owners will do extremely well from the takeover – as many directors of football clubs in England have done before them.
The Lady can expect a cheque for around $180M and Fiszman about the same. Smaller owners who decide to sell will see a nice windfall although others with a great attachment to the club will probably decide to hold on to their little bit of ownership if at all possible.
It doesn’t grow on trees
The money has to come from someplace in order to write such very large cheques. And there has already been a lot of debate about whether the club will be loaded with debt or whether some other structure will be chosen.
First of all Kroenke is going to organize his financial affairs – including the purchase of Arsenal FC – in the most favourable way possible. That almost certainly means a complex and interwoven structure that involves his other assets.
The media will surely make much of any such complexity but that does not mean it is a bad thing.
Next point – business people rarely have hundreds of millions of dollars sitting around the house just being uses for decoration. That means the money will have to be borrowed – yes, debt will likely be incurred. Business people also make money by being able to generate a return greater than the rate they borrow at. That is what they do.
But it is not the debt that it is crucial but more the type of debt and what might be pledged as security for the debt. Previous football club buyers have used the assets of the football club as collateral for the loans required to finance the purchase.
Fans do not like this because if the borrower gets into financial trouble then the ramifications for the football club can be severe. Points deduction, bank repossession, players being sold and now FFP all come into it.
However, the statement issued to the stock exchange rules out such a financing method – “The offer will not be funded by way of any debt finance … for which the payment of interest on, repayment of or security for any liability [contingent or otherwise] will depend on the business of Arsenal.”
It is more likely that the money will secured through Kroenke’s general assets rather than specifically against the football club. That means a shopping mall near you may be acting as part of the collateral.
With the borrowing comes borrowing charges. (Even without borrowings any businessman would look at the opportunity cost – what else he could have used the money for).
To cover the cost of borrowing (or opportunity cost) Arsenal Football Club will be expected to generate additional net revenue – how much will largely depend on how many of the other shareholders decide to cash in.
Depending on how Kroenke’s business and legal minds structure the deal some of the borrowing cost may be deductible against any profits and thus reduce the net cost.
Where will the additional money come from?
Ironically, Kroenke may have been eyeing the experience of the Glazers at United and spotted a solution……or at least part of one.
Under the Glazer’s United have aggressively addressed commercial revenue and have driven the revenue stream much higher. Arsenal is known to be a relatively poor performer in terms of commercialization. That is definetly an area that could contribute more.
There is also a hope that FFP will put the brakes on costs – particularly players salaries.
Sir Alex Ferguson has noted that the switch from board control to control by a majority investor (there is still a requirement for a board but it will exercise less control) has made things easier as decisions are made much more quickly.
It should also allow Arsenal to operate in a leaner, meaner, more efficient and probably more effective manner.
Another positive is that the uncertainty is now over. A dynamic of a number of individuals owning a significant chunk of the organization could never be a permanent arrangement in this day and age. It is an inherently unstable structure that would have eventually crashed and burned.
Frankly the past board is to be congratulated on holding the arrangement together for so long while others around them crumbled.
Probably the most important element to the deal is that Arsenal will be controlled by an individual who has a solid track record of ownership in many different sports and who has grown his businesses rather than slashed and burned to great wealth.
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