Red and White are planning a hostile takeover using non-dividend equity. Beware! « Untold Arsenal: Arsenal News, supporting the club, the players and the manager

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Publication on July 20th: Woolwich Arsenal, the club that changed football. The book that re-writes the Arsenal story.

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By Shard

This article is in two parts.  This first part relates to the Red and White Open Letter, which is available here

Part two which will be published shortly relates to the issue of shares

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The Usmanov letter raises two points straight off.

1. Gazidis is giving the impression that R&W might cause conflict.

2. Gazidis approached Megafon for sponsorship, of which Usmanov is 50% owner.

It then goes on to say that R&W have invested £200m in the equity of the club. But more important than the investment (they say) is their feelings for the club, and their claim that they would never do anything to destabilise it.

The bit about them being fans can be ignored. They are plainly not, and their claims in that regard are foolish. The bit about  point 1 and R&W never looking to cause conflict can be taken together, and debunked, because they are causing conflict just by publishing this letter.

They also talk about Usmanov never seeking a board seat, and him not holding one in any of the companies that he invests in. Therefore the accusation is that Arsenal are falsely implying that Usmanov wants a board seat.

As far as I am aware, Arsenal never made that insinuation. When Gazidis said Arsenal will not be changing the structure of the board was in response to a question asked of him. While his meaning was plain, it was plain only because we all know it to be true that Usmanov and the current board do not share the same vision of the way forwards for the club.  In short, Gazidis never said Usmanov wants a board seat.

R&W also say they have maintained a strict policy of non-interference in the running of the club, and have supported the management through their voting rights.

Fair enough. Except, they clearly are not in support of the board, and they intend to arm twist the board’s running of the club through the use of press releases such as these, aimed at inciting fans to change the club’s behaviour. That doesn’t seem like a policy of non-interference to me.

They further accuse the board of having conflict amongst themselves, citing the names of Dein, and Bracewell-Smith etc who were removed from the board.

In fact, when Gazidis said there will be no move to give R&W a seat on the board, he himself referred to these upheavals and said that we are now a board pulling together in the same direction, and any change would affect that adversely.

They also refer to a lockdown agreement, though I do not understand what their point with that is. They acknowledge it was done initially to keep Kroenke out, and then to keep them out. How is that something which should be seen as bad, I don’t know. Maybe someone can explain this to me.

They now come back to the “financial model, the lack of investment and the Club’s future strategic direction” they had referred to earlier. To break it down as best as I can R&W essentially are accusing the board of deliberately moving to increase the share price so that they could sell their stake for massive profits. They criticise building the stadium with long term debt, and instead say it should have been done through a mixture of debt and non-dividend equity.

Non-dividend equity is interesting, for it is the type of financing that the owners of Manchester United are looking at in their latest refinancing of the club.  In essence it tries to sell people shares in the business, but says, “you can’t get a dividend”.  So the money just sits there, until someone else wants to come along and buy your share.

In a way it is a bit like buying a house.  You have your house and it doesn’t make you any money while you live in it.  Any profit comes when you sell.

The non-dividend equity is a legal version of a Ponzi scheme (which is illegal) which uses investors’ own money or money paid by subsequent investors, rather than from profit earned by the individual or organization running the operation. The Ponzi requires an ever-increasing flow of money from new investors to keep the scheme going.  The Glazer and Usmanov favoured non-dividend equity scheme requires that new investors are around to buy the shares at higher prices.  (If they are not, and everyone sees they are not, the scheme collapses just like a Ponzi.

But as I was saying, they are accusing the club’s directors of manipulating share prices to personally enrich themselves. The criticism also lies in the fact that they did so ‘whilst avoiding dilution of their equity’. As I understand it, the share price shot up not with the stadium itself, nor when it was financed, but when you had first Kroenke, and then Usmanov, pay higher sums for Arsenal shares than in the past. Did the board envisage investors coming in? Perhaps. But maybe that’s also why they did not have a rights issue earlier, so as to prevent somebody gobbling up shares and initiating a hostile takeover. You might say they were guarding against the likes of Usmanov (and to a lesser extent, Kroenke), before Usmanov even appeared on the scene.

Usmanov’s problem with the lack of a rights issue is clear. He criticises the board for not diluting their equity because he intends to buy that equity, and gain a larger foothold towards owning Arsenal. The reason he needs to do this, is because the board, whom he accuses of enriching themselves (which they did) as their main consideration in terms of picking their policies, actually chose to sell their shares to Kroenke at a price lower than what Usmanov was offering.  Thus I conclude that this talk of selling out and pointing fingers at the board is at best a half truth, and his only problem being they didn’t sell out to him.

R&W continually talk about the fans as being on their side, or themselves expressing fans’ concerns. This is easy to do as all fans will have some concerns about say, lack of trophies, losing players against our wishes etc. Nobody can be happy at this. But, they suggest the problem lies in the financial model of the club (this may or may not be true, and certainly can be debated to what extent this is the case) But the fact remains, that they use those concerns to push forward their agenda. That is their right. But just because we have the concerns they echo, doesn’t mean they are correct in what they imply, nor what they suggest.

Some examples of them putting themselves on a similar footing as fans are “The real conflict seems to be between the supporters’ expectations and your vision for the club”, “pursue a policy of increasing ticket prices and squeezing the fans”, “we own almost 30% of the club or to put it another way almost 1 in every 3 seats in the stadium”. The last bit is a cheap, but stupid attempt to put themselves on the level of fans. As is talk of ‘squeezing the fans’,  for which they blame the ‘so-called policy of self financing’.

So what is the solution to this policy that R&W offer? They again suggest a rights issue to raise some funds, and apart from random talk of how we lose our best players  etc (which I brush past because it is not policy that they are talking about) , they state their vision as ” A debt free club, with a big enough war chest to buy top players who can hit the ground running and who can complement the Club’s long tradition of developing young players and homegrown talent.” This is followed by talk of trophies etc, which again I say, is not important to the issue. They do however say, “We also believe in the transparency that a stock market listing brings, so are committed to the Club remaining listed on the stock exchange and to greater fan involvement both through share ownership and also Board representation for the fans”.

As regards the vision of the club whereby the club is debt free and being able to buy top players etc, it is entirely the vision that the current board sell us. The thing is, R&W offer no details on HOW they intend to pull of this dream. We know how the current board intend to, and what they have been doing for it. The stadium move, the long term deals, the paying off the loans, signing new, and in a few years, improved commercial deals to improve commercial income.

R&W claim that they want the same thing this board does, but offer no insight on how they plan to do this. They mention that trophies “increase the value of the players, the value of the brand, attract the best sponsors and maximise the value of our commercial contracts..”, but do not mention how they intend to get the club trophies. Nor do they expressly say they will reduce ticket prices (which even if they said would be meaningless). Basically, they are quick to allege improper conduct by the Board, point out problems the current Arsenal have, echo some concerns that fans’ will have, but offer no solutions of their own beyond having the Board undertake a rights issue. Their only concession to fans in their plan is a commitment to staying on the stock market (while also saying they’ll keep buying shares), and that they’ll have fans on the board. Who these fans might be, is anybody’s guess, and even if these fans are independent in their assessment, I doubt it is anything other than a symbolic appointment (if and when it happens).

So, beyond all the double speak, the talk about concerns over the current functioning, the R&W letter doesn’t really offer solutions except in relation to the one which helps them in their goal of taking over.  It is just a reiteration of certain concerns and problems Arsenal face at the moment. Of itself, that is fine, but the intent is quite clearly to present a poor state of affairs, and present themselves as the solution without really having to offer any.

Their accusation regarding the board policies, I have talked about. The ones regarding Gazidis suggesting Usmanov wants a board seat, or that R&W are the ‘enemy’ also I think I have cleared. The remaining ones are about Gazidis contacting Megafon (which personally, I don’t see the problem with, since R&W themselves say Usmanov isn’t on the board on any of the companies he has a stake in), and the one about Kroenke’s bank loan (which is a personal loan, not an LBO as far as I know). I don’t mind the demand for the details of that transaction to be known to us, but I do find the insinuation of wrongdoing, a little low. It is mudslinging, designed to put doubt in the fans’ mind and thereby, in contrast make us view Usmanov and R&W favourably. Thus that much is self serving, and is not out of any love or care for Arsenal’s interest.

The merits and demerits of a Rights Issue should be discussed. That is the only concrete proposal given by R&W, and we should see what it means for Arsenal.

In part 2 we shall look further at what Mr Usmanov is planning.

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