Celtic Underground · @celticrumours
8th Dec 2012 from Twitlonger
The following post appears to have disappeared from ff. Its entitled "don't buy shares..."
... Unless you like wasting your money
Sorry, but it's a dud deal.
I have conducted this analysis purely with an investor’s hat on and my Rangers hat off.
You need to remember that most public offerings are conducted purely as an exercise to help seed investors liquidate and take profits, and this case, that is certainly the case. Following the listing, there will be up to 71m shares of RIFC, of which 33m will be left over from the pre-listing investors. Some of these, including Charles Green, bought in for 1p. The rest got in for 20p. After the float, subject to some who are bound by 12 months escrow rules, they will be able to sell their shares and take very large profits.
The price and valuation they have arrived at assumes an overall value of Rangers at £50m, which assumes a valuation of 77p/share, thereby justifying their offer price of 70p as being at a discount to the overall value. However, IMO this valuation has been derived by accounting tricks.
Take for instance, the profit figures. Well firstly they are dangerous because they only cover 3 months of operations and don’t show a full year’s operation (we all know how Celtic are very good at hiding losses by deferring them to later or earlier in a season), but nonetheless the Club claims to have profits of £13m from £40m revenue on an annualised basis. This struck me as a very high margin, which caused me to look more closely at it. The accountants have added £20m in profit by virtue of gains from negative goodwill – in other words, they bought Rangers really cheaply from Duff & Phelps, so the additional true value gets recorded as profit. No cash actually changed hands and it’s a one off, so without that extraordinary item, the club was actually losing £7m.
Then consider the cash position. It declares £4m in positive cash flows, but £7.7m of this came from equity injections. Then further consider the balance sheet: £47.7 in net assets, but £43m of this is property (Ibrox and Auchenhowie) which is very difficult to sell or use for any other purpose than what it currently is. Admittedly, the prospectus does recognise this factor, as this valuation is already heavily discounted from the £70m independent valuation, but it’s highly debatable as to whether the club could ever realise that much on sale.
As an investor, if I were going to pay 70p per share, I would be expecting annual earnings to be at least 5p/share (7% equity risk premium) which assumes that RIFC has to make a profit of no less than £20m on average annually. That’s possible, but experience tells us that is highly unlikely unless something game-changing like joining the EPL or winning the CL happens… and the prospectus tells us a move to England is not being considered.
Football clubs rarely ever pay dividends, so the only hope of recouping your investment is to sell your shares one day for far more than 70p, as the time value of money principle means your initial investment is actually eroded by inflation.
IMO, the offer is probably only worth about 30p, which is a long way short of 70p.
Now putting the Rangers hat back on, there is even more reason to be cynical about this offer. Post float, the public will only have 20% of shares. 34% are being offered privately to institutional investors (banks, pension funds, etc) and the other 46% will remain with the original investors. My experience with listed companies is that this provides no democracy at all. Institutional investors don’t get active and more or less just always support the existing directors. If they are unhappy investors, they just sell-out. So no matter how many shares you or I buy, we will never have fan control unless we buy out the original owners like Green, Khan and Mather.
Yet another example of why this is a dud deal.
Fans will be better advised to save their money and invest it in things like tickets and merchandise and make them earn it the hard way, rather than allowing them to cash out their profits Facebook style.