How Mr Usmanov wants to use a rights issue to take over Arsenal « Untold Arsenal: Arsenal News. Supporting the Lord Wenger; coach of the decade

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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 is a continuation of yesterday’s  Untold Economics article: “Red and White are planning a takeover using non-dividend equity.  Beware!”

The first part related to the Red and White Open Letter, which is available here

So, to continue, we now ask, “What is this Rights Issue that Mr Usmanov wants Arsenal to have?”

And the answer is…

” A rights issue is an invitation to existing shareholders to purchase additional new shares in the company. More specifically, this type of issue gives existing shareholders securities called “rights“, which, well, give the shareholders the right to purchase new shares at a discount to the market price on a stated future date. The company is giving shareholders a chance to increase their exposure to the stock at a discount price.

Troubled companies typically use rights issues to pay down debt, especially when they are unable to borrow more money. But not all companies that pursue rights offerings are shaky. Some with clean balance sheets use them to fund acquisitions and growth strategies. For reassurance that it will raise the finances, a company will usually, but not always, have its rights issue underwritten by an investment bank.”

http://www.investopedia.com/articles/stocks/05/062905.asp#axzz1zwV6AwCI

Ok, so it seems, generally (but not always) Rights Issues are done by companies who can’t finance their debts, and that too generally when they are unable to borrow more money. (This makes a Rights Issue seem the last option even for companies in trouble) However, some clean balance sheet companies use them to fund acquisitions and growth strategies. In addition, in order to ensure raising finances, companies get this rights issue underwritten by an investment bank. The bank presumably looks into what the value of your acquisition is, or how you intend to grow, and will back the sale of the rights, at a certain price, based on that.

So, we need to decide how much cash we need/want to raise, and then justify it in terms of the value it brings to the company. For that, let’s try and see what we can do with the money. We could pay off our stadium loan, which will allow us to use our profits for investment in the team. There is, however, a penalty for paying off the loan early. I don’t know how much this is, but it is said to be enough to make paying it an option that isn’t really viable.

We could also use the money to buy players, or increase our wage cap so we can keep hold of star players. I don’t know how we would justify that to a bank though.  Buying a player adds value to the club only for the length of his contract (the value is written down over that number of years). Players are assets, but their value is constantly depreciating. If you intend to hold on to a player (which after all is what the rights issue is about in the first place) then his value is only notional, in the sense that you aren’t going to get any money for keeping him at the club.

I find it difficult to understand, how from a business point of view, a Rights issue can be justified. It doesn’t help us pay off our debt, it doesn’t offer us growth, unless we use that money to invest in infrastructure I guess. So a Rights Issue might not even be feasible. But, I freely admit, I don’t understand these things completely, and let us say, we can get a Rights Issue underwritten by a bank (or even that we don’t need to get it underwritten because we are confident we’ll raise the money)

So..How much money do we want? £10 million?, 50? 100? What does £100million get you? A £32 million pound Hazard (pun unintended) + 180k p/w = a payment of 32 + 37.44 million commitment over 4 years. Which is a nearly a 70million pound commitment. But lets say, we only need one such player, and some extra funds for other players, and take a nice round figure of £100million pounds to be raised from sale of equity.

The prices of our shares on the market over the last few years are listed here .  The maximum share price paid on the market has consistently gone up, with the last figure available being for the 23rd of March 2012, where the share price was £16,800.

Arsenal have issued a total of 62217 shares. Of this, KSE UK Inc. owns 41,581 shares (or 66.83%) and Red and White Securities Ltd. owns 18,496 (29.72%) Which leaves a total 2140 shares (3.44%) owned by other parties.

At the price of 16,800 a share, to raise 100million will require the issuing of 5952 new shares (approx) However, Rights Issues  ” give the shareholders the right to purchase new shares at a discount to the market price”.   Which means the new shares will be offered to current shareholders at lower than the market price. How the price for the rights issue is set, is I’m sure fairly simple to some intelligent people, but I couldn’t quite carry out the calculations.

Although there is one point here.  The cost of Arsenal shares have been forced up by Mr Usmanov’s aggressive purchasing policy.  Before he put up his “will buy” notice the price was much lower.  The price Mr Kronke paid for the shares was much, much, lower.

Lets say Arsenal announce a 3 in 10 rights share issue with plans to raise 100 million dollars. This means, for every 10 shares owned, 3 new shares will be offered. So, of 62217 shares, we will add 18665 shares. Of these, 12,474 will be offered to Kroenke, and 5549 will go to R&W. Both will have to pay roughly, 66.83 million and 29.73 million respectively at a rights price of 100million divided by 18665 = 5357.62. So to give Arsenal a 100million increase through rights issue, it becomes incumbent on Mr Kroenke to pay for nearly 67 million of those, simply to keep his stake at the same level. A price we may note which is at the very high price it is because of the activities of Mr Usmanov.

Now you can look at it as Usmanov is willing to give Arsenal £30 million (if we raise £70 million from elsewhere) just to maintain the status quo, and Kroenke isn’t interested in putting up his share of the money, and thereby say Mr Usmanov cares about Arsenal and is willing to put up his money, and Kroenke is the greedy one who doesn’t want to invest into Arsenal.

Or you could think about it a bit more, not take what they say at face value, and conclude that the Rights Issue proposal has only been made because Mr Kroenke will not accept spending £67 million to own what he already has bought. Since they know Mr Kroenke will refuse, they know they will not have to spend any more money. But they can make Kroenke look bad in the process. This is how politics is played.

Also, let’s consider the 2140 shares with smaller shareholders. There will be an extra 642 rights on sale. Which will represent 0.79% of the total share. To purchase these shares, these people will have to stump up a combined £3.44 million pounds. In these current times, how many people will be willing and able to pay more than £5000 to keep their stake at the same level. A stake, they are mostly holding on to for emotional, rather than financial reasons. They could then either refuse their rights on those shares, or they could sell those rights on to anyone willing to buy. For anyone who wants to buy a 0.79% share at this moment at the current highest share price, they will have to pay, £8.27 million. Thus if anyone buys those rights from the smaller shareholders, they have a saving of nearly £5 million. If R&W buys that, they push themselves above the 30% limit, buying the only shares they are likely to ever be able to buy, at a discount. Thus R&W’s suggestion for a Rights Issue isn’t selfless.

And this is before we try and work out what happens to the Fanshare scheme, and how the shares owned by Arsenal Supporters Trust will be affected.  Mr Kronke and Mr Usmanov have said in public they support both AST and Fanshare – so how is it going to play out?  You might imagine that AST and Fanshare subscribers might like to know what happens to their money.

I think a Rights Issue could help Arsenal in terms of bringing in more money as a one time thing. But Kroenke is not likely to agree to this, quite reasonably, since he has no reason to. He’s already put in a lot of money in buying his stake in Arsenal. Mr Usmanov knows Mr Kroenke will not accept this proposal which offers him nothing, so Usmanov knows he stands nothing to lose by proposing the rights issue. He only stands to gain by sullying Kroenke’s reputation, and painting him as greedy, and putting himself in the role of the frustrated wannabe messiah. It is, in effect, a hollow proposal. If Usmanov is only interested in being a sugar daddy (though nowhere does he expressly say he’s willing to throw money at Arsenal), there is nothing stopping him from writing a 30million pound cheque right now to Arsenal. Status quo is still maintained, and Arsenal are £30million richer.

What R&W are doing, is trying to initiate a hostile takeover. We, the fans, (not to mention the AST and Fanshare fans) are pawns in this game. A means to achieve an end. They do not share our concerns, they do not have the Club’s or the fans’ interest in mind. They look primarily to their interests. I also don’t say that KSE or the board put the Club’s interests ahead of their own. That would be naive. Their interests, however, cannot lie in running the club poorly. But so far, the only reason given in favour of change (and revolution as some like to call it) in the ownership, is that Kroenke has failed (which is not conclusive anyway), and Usmanov is not Kroenke, ergo, they are.

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