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Hicks & Gillett v Royal Bank of Scotland

Sat, 9 October 2010

Hicks and Gillett appear to value the club at £600 million.

About £440 million would appear to be the break even for them:

“In fact, they may have to write off about £140m if a reported sale of about £300m goes through.”

Would any owner of any substantial asset allow the asset to be forcibly sold with a sizeable loss to himself without putting up a fight?

I have no sympathy for Hicks and Gillett, but increasingly, notwithstanding the conceptual difficulties (of having less than no sympathy), I have even less sympathy for the Royal Bank of Scotland.

Clearly, the bank miscalculated when it agreed to finance the leveraged purchase of Liverpool (as did Hicks and Gillett in buying Liverpool). The bank’s incentive to do so would have been the substantial interest and fees it would have earned. In the case of Hicks and Gillett the motivation would have been the subsequent sale of the club at a higher price. They could not possibly have seen themselves making a profit in the short to medium term could they? In both cases, the miscalculation was the result of greed.

Payments on the loans are overdue. As the loan to the holding company is secured against the shares in the football club, RBS could enforce its rights and sell the shares. However, such a forced sale carries two risks for RBS: (i) the bank may be under a duty not to realize the shares at an undervalue, failing which, it may be liable to the owners for any shortfall; and/or (ii) the sale price is likely to be significantly lower in a forced sale, with the risk that RBS doesn’t recover what is owed to it in full.

Instead the bank gave Hicks and Gillett further extensions of time, based on certain conditions including:

Hicks and Gillett get more time (effectively, extra rope with which to hang themselves), RBS get a sale through with less risk to themselves, and with a better prospect of recovering all sums owing.

Repayment of the loan in full, plus substantial interest and fees for RBS, Gillett and Hicks about £140 million out of pocket – RBS wins.

In the Liverpool Echo in July:

“Liverpool FC borrowed too much cash, says boss of RBS

….

Don’t banks have any responsibility?

It is not uncommon for aggressive banks to lend more to riskier borrowers in order to earn higher interest. As long as the interest is being serviced, it looks good on the books, and bank officers earn higher bonuses, with every prospect of those who negotiated the loan being regarded as high flyers to be “poached” within a couple of years by a competing bank at even higher salaries and bonuses (well before the loan starts to unravel).

The borrower faces insolvency if it doesn’t pay.

The bank earns high interest for a few years at least (during which time, higher bonuses are paid), and when the borrower finally defaults, the new team at the bank just write off any losses.  If the hit is too much for the bank to take, it can always count on the government to pump in taxpayers money.

If Hicks and Gillett know that they are going to be losing about £140 million in any event, they may well be trying to give RBS a bloody nose on their way down.

“You’ll Never Want A Loan”.

(Adapted from two posts on Tony’s Non-League Forum – 1st & 2nd)

6 comments

  1. If you need leverage
    To buy a football club
    Be very afraid of the sharks
    All they care about
    Is a higher yield
    Dollars, pounds, euros, francs, leave no marks

    Go on, pay the fees
    Go on, interest too
    As your dreams are tossed and blown
    Go on, go on, and soon you will learn
    That you’ll never want a loan
    You’ll never want a loan


  2. You’ll Never Want A Loan

    Hicks and Gillett take on RBS in court today, with the spectre of a rival bid in the background.

    How is Liverpool to be valued? According to Forbes:

    “In April we valued Liverpool at $822 million, the sixth most valuable soccer team in the world. Around that time it was reported that Hicks was hoping to get 800 million pounds ($1.5 billion) for Liverpool. But Hicks (perhaps distracted with the sale of the Texas Rangers) and Gillett over-estimated the market. Now, with an Oct. 6 deadline looming on the refinancing with Royal Bank of Scotland and with thousands of the team’s supporters petitioning the bank not to extend the deadline, Hicks and Gillett may have to settle for as little as $700 million for the team or lose the team to the bank.”

    £300 million looks way off the mark. 8 times revenue would get us to about £280 million? Plus assets (property and players) worth about £200 million? £480 million would give Hicks and Gillett a small profit.

    Hicks and Gillett may not be behind the resurrection of the rival bid, but it clearly aids their cause.


  3. Live coverage on guardian.co.uk.

    Mill Financial have stepped into Gillett’s shoes.

    And a new £320 million bid crawls out of the woodwork.


  4. The chorus has been copied elsewhere:

    http://www.yellowfever.co.nz/forum/forum_posts.asp?TID=1602&PID=577313#577313


  5. A conspiracy claim in Texas – now it really gets interesting. [:)]

    “The independent directors consider the restraining order to be unwarranted and damaging and will move as swiftly as possible to seek to have it removed.”

    BBC Business Editor Robert Peston reported: “Although the Texas court has no direct jurisdiction in the UK, both New England Sports Ventures and Liverpool’s bankers, Royal Bank of Scotland, would not wish to be seen to be wilfully defying that court, because that could cause harm to their substantial US operations.

    “That is why RBS and New England Sports Ventures will attempt to have the restraining order lifted on Thursday. If that’s achieved, Liverpool could then be sold from under Mr Hicks and Mr Gillett within a matter of hours.”

    Having gained the injunction from the Dallas court, Hicks and Gillett described the proposed £300m sale as “an epic swindle” and revealed they are seeking more than £1bn in damages.

    The pair claim the injunction prevents Liverpool executing the sale of the club to NESV, with a hearing date set for 25 October.

    The legal action in Texas – signed by Judge Jim Jordan of the 160th District Court in Dallas – is “part of a lawsuit filed against Royal Bank of Scotland (RBS), Martin Broughton, Christian Purslow, Ian Ayre, NESV and Philip Nash” read a statement.

    “The lawsuit also seeks temporary and permanent injunctions, and damages totalling approximately $1.6 billion (more than £1 billion).

    “The suit lays out the defendants’ “epic swindle” in which they conspired to devise and execute a scheme to sell LFC to NESV at a price they know to be hundreds of millions of dollars below true market value.”

    The statement, posted on the American duo’s behalf by international law firm Fish & Richardson, went on to allege that there had been a conspiracy to “execute a scheme to sell LFC to NESV at a price they know to be hundreds of millions of dollars below true market value”.

    And it is the Royal Bank of Scotland who receive the brunt of blame, the statement continuing: “The director defendants were acting merely as pawns of RBS, wholly abdicating the fiduciary responsibilities that they owed in the sale.

    “RBS has been complicit in this scheme with the director defendants. For example, in letters from RBS to potential investors obtained just within the past few days, RBS has informed investors that it will approve of a deal only if there is “no economic return to equity” for Messrs. Hicks and Gillett”.

    “In furtherance of this grand conspiracy, on information and belief, RBS has improperly used its influence as the club’s creditor and as a worldwide banking leader to prevent any transaction that would permit Messrs. Hicks and Gillett to recover any of their initial investment in the club, much less share in the substantial appreciation in the value of Liverpool FC that their investments have created.”

    While the English High Court reached its decision largely on the application of principles of contract law, there was hardly any reference to principles of company law, at least not in the media reporting of the case.

    Directors should be acting in the interest of a company as a whole, and not just the party that procured their appointment. Unfortunately, in law, “a company as a whole” includes shareholders and creditors, but not customers (in this case, the fans).

    Now we have the tort of conspiracy thrown in for good measure.

    The allegation that “RBS has informed investors that it will approve of a deal only if there is “no economic return to equity” for Messrs. Hicks and Gillett” is very remarkable – hard to believe it’s true though.


  6. Broughton is back in the High Court today, presumably to seek an anti-suit injunction against Hicks / Gillett.



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