OK, so on the deal...
Let's assume the investor wants to take on a 10% stake in LFC for £200m, as in my example above.
Assuming they want to end up with 10% of LFC's shares, there are two ways of doing this:
- They buy 10% of FSG's existing shares in LFC (the sale would be by the UK holding company, UKSV Holdings Company Ltd); or
- LFC issues new shares to the investor which takes them to 10% (so if LFC had 90 shares in issue, they'd issue 10 to the new investor who would then own 10 of 100 = 10%).
At this point, we need to consider tax. In the UK, it's highly likely (but not 100% certain) that the gain on sale in option 1 won't be taxable for the selling company. However, the buyer would have to pay stamp duty at 0.5% on the acquisition of shares (which costs them £1 million). In option 2, that charge wouldn't arise and there would be no risk of a gain (a gain could only arise if existing shares were sold, nothing happens when new shares are created). So the investor would favour option 2 as it's cheaper to execute and it makes sure LFC gets the cash.
However, it's likely that FSG will have treated LFC as tax transparent for US tax purposes - complicated issue, but for these purposes it means that even though there's no tax to pay in the UK, there'll still be tax in the US (under either route, FSG's owners will be deemed to have sold 10% of the underlying assets of LFC). So FSG will probably want to take a chunk out of the sale proceeds to cover that tax bill (such that the whole transaction is cost neutral for their shareholders).
That means that some form of hybrid is the most likely situation - e.g. the investor buys (say) 2.5% from FSG (giving them £50m to cover tax bills) and subscribes for a further 7.5% of the shares, taking them to 10% and giving LFC £150m of cash to spend. They'll pay stamp duty of £250k, so they might negotiate a price chip to cover that, but probably not given it's a small amount in the grand scheme.
There's then the issue of banking to consider. LFC has a revolving credit facility (basically a business version of an overdraft) and there's a good chance that the facility will be secured by a charge over the holding company's shares in LFC (i.e. if LFC defaults on its debt, the bank can seize the shares from the holding company and sell them to ensure it gets repaid - similar to a mortgage, but in this case LFC takes the role of the house).
What this means is that it may be complicated if the new investor's money comes directly into LFC (as then the new investor would need to be a co-guarantor of the bank facility, and consortia / banks generally don't like this - a group of investors usually sets up a company which they own between them, and the company gives the guarantees). This would likely push the level at which they invest up to the immediate holding company (UKSV Holdings Company) or above.
And bear in mind that all of this doesn't allow for the benefit of creating new interest-free debt that could be converted into shares at a later date to help with FFP as per my first post. So, if I were advising an investor, I'd recommend:
- Purchase 2.5% of the shares of UKSV Holdings Company for £50m (or whatever FSG need for their tax bill)
- Subscribe for shares to take them to 10% total of UKSV Holdings Company for a further £150m
- UKSV Holdings Company lends £150m, interest free, to LFC, no fixed repayment date
Obviously in a transaction it will all come down to negotiation, but that would be my thinking.
Alternatively they could:
- go with my original illustration of a straight sale and reinvestment, but that cause some tax leakage and may affect the price the investor will pay (albeit not a huge amount in the grand scheme of things); or
- they could inject the cash directly into LFC for new shares and pay down some of the stadium loan to get the money to FSG to pay the tax bill (but they then lose the equity conversion option for FFP).
And don't @ me on the ethics of structuring to keep the tax bills down, that's just how these things work. And if tax reduction were really a motive, they'd make the loans interest-bearing and try to reduce the UK tax bill of LFC by claiming tax relief on the interest - this is what the Glazers have done at United (and why they still have shitloads of debt due to the family) but it's not something FSG have done historically.
And finally, on the valuation point, an acquisition price of £200m for 10% seems, at first glance, to imply the club's shares would be worth £2bn, but in practice an investor purchasing a small, minority stake, will discount their price as the structure gives them no practical influence over the management of the club (they can't veto shareholder votes and can't carry votes on the board). So a sale of 10% would likely realise a bit less than 10% of the club's true worth. This is likely to cause some tension in the negotiation process, and the sell to FSG needs to be that the extra investment in the club will compensate for the bit of value that they are giving away by selling for less than pro-rata value.
I hope you guys can follow that, but feel free to ask questions to clarify if you need to.
