Wednesday, 28 January 2015

Investment: An Expert View

Andrew McGlashan takes a quick look at what investment could mean for the Swans

It’s been a far from quiet January for us Swansea City fans and today has been just as busy with the news that an investment from US businessmen John Moores and Charles Noell may be close. The recent reports are that perhaps 30% of the shares in the club will be sold for around £30 million. As I have a corporate background I thought I would give my initial thoughts on this to shed some light on the impact of such an investment. 

1. Why are the board considering such an investment?

I’ve dealt with a variety of different investment types in the past few years and they do come in a variety of shapes and sizes and for a variety of reasons. Typically, an investment into a company that is doing well happens for one, or a combination of, these reasons:

(i) The board running the company know that in order to kick on and take the company to the next level, they require a significant injection of cash to develop and carry out their bigger ideas;
(ii) It is decided that in order for the company to continue growing, certain expertise and experience are required and in order to get this, a piece of the company has to be offered to incentivise such persons to join (think Dragons’ Den); or
(iii) Those who set up the company want to realise some of their initial investment into the company by selling some of their shares at a much higher price than they purchased them for. 

Now looking at the situation with the Swans and the board / shareholders, it could be that the reason for such an investment is in fact all of the above. Huw and the boys may well think that in order to avoid stagnating and running the risk of relegation, an injection of cash is needed to kick us on player wise as well as infrastructure and stadium wise. Further, the board may have realised the potential for commercial opportunities in the US given the popular rise of “soccer” over there in the past few years. These potential investors do have experience of running American sports teams and so could offer expertise, experience and connections in relation to this. 

Finally, the shareholders (save for the Trust whose position has been well documented) may want to extract some of the value that they hold in their shares. The £50,000 they initially invested is now worth a huge amount more if the club is valued at £100 million as reports suggest. This investment would allow them to sell some of their shares at a massive premium and that money will go straight into their bank accounts. 

2. What would be the impact?

Without being party to the negotiations it is difficult to comment accurately on this so I will have to comment on what happens typically. The first thing to understand would be that the £30 million paid by the investors doesn’t go to the club but to the shareholders selling their shares. So the existing shareholders (save for the Trust who are reluctant to sell) will sell a proportion of their shares for a proportion of the £30 million. This dilutes their influence re voting rights as they own less shares but is very good for their bank balance.

Any money to be injected into the squad, facilities etc is likely to come from loans from the US investors. This could be for significant amounts but obviously the investors are going to want some sort of security / protection for their loans. This security could well be that the loans are not repaid but the investors get issued more shares instead, meaning that everyone else’s shareholding, including the Trust, gets diluted. The impact is that the new investors have more sway and the rest of the shareholders have less. This is obviously just one option and it could well be the loans are secured over the training ground / other assets of the club.

Further, the investors are likely to each be nominated to the board, meaning that they have influence over the board’s decisions. In addition, if they were to hold 30% of the shares, they could block any “special resolutions” which the shareholders want to carry out as these require 75% agreement between the shareholders. These will be the more important decisions which gives the investors protection by restricting what the other shareholders can do. It does also mean that, with only 30% of the shares, they cannot vote things through so they won’t be calling the shots.

It may also be that the shareholders, once the investors are on board, will enter into a separate agreement between themselves and alter the “articles of association” of the Swans. These “articles” basically set out how the Swans is governed, how decisions are made, how many directors you need for a meeting to be held etc. The new investors, through this agreement and a new set of articles, will be able to insert special provisions which basically mean that nothing big happens without their consent. Again this provides them with some protection so that they have a say on all the big decisions the Swans board makes and nothing goes on behind their back.

3. What happens now

Well from what I can gather talks are ongoing and board meetings will undoubtedly be being held regularly to discuss this. Should the investment go through, a good indication of the changes can be found out at Companies House as the Swans will have to register any changes to their shareholdings and their articles. This will indicate the extent of power that the new investors will have and how much of the club’s shares they own. What these will say we cannot be sure of until / if the investment is confirmed.

Until then, we can be sure that the fans will be voicing their opinion and the Trust will be at the front of that. Everyone will have different views on whether such an investment is needed but hopefully this article has given a brief insight into the potential deal that is before the club.

Once we have more information, and I have more time, I’ll go through this in more detail and give me views on whether this deal is needed but hopefully this brief review has been helpful!

Thanks to Andrew (@ajmcglashan) for taking the time to put together this piece, which is a more analytical, and a lot less partisan than mine (link). Without knowing details it's hard to know what to think, and hopefully we'll know more in the near future.