Like most people whenever I decide I won’t buy something I like to hold a press conference telling the world what I would have done if I had bought it, and why what I would have done is so much better than anything that anyone else would have done if they had bought it. Only yesterday I decided not to buy a bar of chocolate but if I had bought it I would have eaten it and savoured the melt in the mouth quality much more than you would have if you had bought.
To the extent that holding press conferences to announce that you are not doing something is normal, today’s press conference by the Blue Knights consortium who have decided not to proceed with an offer to buy Rangers, is unsurprising. They stressed that they wished to invest in Rangers, acquire Craig Whyte’s shares, and wanted a security free purchase (by which they mean the floating charge held by Whyte’s company presumably – although how they propose to deal with the standard security for 1/2 million in favour of the Scottish Sports Council revealed in the aministrators’ statement of proposals is not obvious). The solution of the Blue Knights is that a company voluntary arrangement will be entered (and as secured creditors are not bound by such deals – removing the securities is crucial to the success of the company going forward), the creditors taking pennies in the pound for the oustanding liabilities, and with one bound Rangers will be free. That this would cover contingent liabilities (valued – unless the chairman of the meeting considering the CVA agrees otherwise – at a princely sum of £1 for the purposes of the CVA votes according to paragraph 1.15A of the Insolvency (Scotland) Rules, whatever the potential tens of millions of pounds of liability in any big or little tax case) could offer an attractive option to Rangers – but is dependent on agreement of three quarters of the relevant unsecured creditors.
So far, so what? But hidden away in the press conference was an interesting line from The Blue Knights. Brian Kennedy (a rugby club owner who is tied in to the group) indicated that he had spoken to former preferred bidder, now former bidder, Bill Miller to stress that Miller’s proposed solution – that a new company (newco) be set up to buy Rangers whole undertaking leaving the old company to wither and be liquidated, sorry leaving the old company to merge with the new company at some undetermined point in the future – did not work financially.
With a legal hat on The Blue Knights’ analysis of the newco model as not working financially is a bit odd. A newco is the normal mode of exiting administration in businesses. This is why many administrations are set up in a pre-packaged (or pre-pack) form with a newco being there almost instantly to acquire the assets leaving the detritus in the old company. It works because all of the liabilities are parked in the oldco and the business is transferred (in exchange for a fair value) to a newco which starts free of any liabilities. If the oldco had a floating charge while it preserves the priority of the relevant creditor over the assets of the oldco (now only the proceeds of the whole undertaking sale) – it does not leave any ongoing liability over the assets sold to the new company. The newco model is then often the most financially attractive solution for investors. It allows a fresh start and leaves (often) unhappy creditors.
However, the Kennedy line was that the newco model would not work financially and that this was advised to Miller. During the press conference no-one asked why it would not work financially. Now there are potential regulatory issues within football regarding licences to compete with the SFA and SPL (and frankly if you want to know about that you’re better off elsewhere. I have not digested the football rule books) – but that is not what Kennedy said. He said, a newco would not work financially. So how does parking all liabilities in an old company and starting free from liabilities not work financially on The Blue Knights’ business plan? The only clear consequence for a newco is inability to qualify for Europe for 3 years. Does this indicate that TBK’s business plan is dependent on the oldco exiting administration with a CVA and being permitted to play in Europe (with a resultant revenue stream) in years 2 and 3? If so, it is not clear that that would be possible for a Rangers club that must cut its wage bill. And it is by no means certain that UEFA would allow the club in to European football following the insolvency event. Or perhaps this is not the great financial benefit that Kennedy envisaged?
Any thoughts on the financial problems that would arise for a new company with all of the assets and none of the liabilities do please let me know.