Kroenke's move should set alarm bells ringing

Gabriele Marcotti

Hmmm ... so Stan Kroenke has once again increased his shareholding in Arsenal to 29.6 per cent.

If he secures another three-tenths of one per cent, he'll reach the obligatory takeover threshold of 29.9 per cent. If that happens, he'll have the opportunity to buy up the rest of the shares for around £460 million. And that, all of a sudden makes people nervous. Why? Well because that's a lot of money and speculation is that he will probably choose to acquire the club via debt, as was the case with his fellow Americans who bought Liverpool and Manchester United. And, as Arsenal Supporters' Trust points out, that's not a good thing.

Indeed it isn't. Even if he does not borrow a whole bunch of money and then dump the debt on to the club (as some of his brethren have done), Arsenal supporters (and chairman Peter Hill-Wood) say it would be best if Arsenal did not have a single owner but, instead, was owned by a "plurality". Nice idea. Except, in the real world, when somebody pumps several hundred million into a club he might reasonably be expected to be the boss. Especially if it's a guy like Kroenke who makes his living in running sports teams and has no particular ties to Arsenal Football Club.

This ownership game is a dangerous thing. Not because the owners are foreign (heck, Randy Lerner is foreign too and, by all accounts, he's a wonderful owner), but because of the risks down the road (and, yes, Manchester United's chickens may well come home to roost real soon).

It would be wise of the Premier League (or, rather, the guys who own Premier League clubs who are the people who ultimately tell Richard Scudamore what to do) to be vigliant and even go so far as to ban certain types of acquisitions.

Curbishley was right. And wrong

Alan Curbishley has won his case against West Ham for constructive dismissal.

Reportedly, it hinged over the fact that, according to his contract, he was to have the final say in all transfers and, instead, the club sold Anton Ferdinand and George McCartney against his wishes. 

Personaly, if that's what his contract said, it's a fairly open-and-shut case. I can only hope that, in future, clubs will think twice before turning managers into omnipotent beings. It seems pretty obvious to me that a club's needs (especially in this case, given the collapse of West Ham's owners) might sometimes be at odds with the manager's. West Ham needed to raise money quickly by selling players.

Curbishley thought selling those players would weaken the team (which would reflect badly on ... Curbishley). From where I sit, it was a case of "needs must".

Still, it's rather interesting to see what happened with the two transfers which upset Curbishley. Ferdinand was sold to Sunderland for £8 million. His place in the starting XI was effectively taken by James Collins who was already at the club and was signed for £1m several years earlier and, of course, was sold last August to Aston Villa for £5m. Who's the better defender? Who got the better deal? 

Did it make sense for West Ham to sacrifice Ferdinand (who, lest we forget, was coming off an injury-plagued season which saw him make just 22 league starts the previous year)? Sunderland fans, West Ham fans, Villa fans ... who would you rather have?

As for McCartney, he was sold for £5 million. His place was taken by Herita Ilunga, who arrived on loan from Toulouse and became a permanent signing in the spring of last year. McCartney has started 22 league games for Sunderland since the switch, which is less than half as many as Ilunga's 45 league starts. Again, you be the judge? Whos' better? Who would you rather have? Is McCartney £5m better than Ilunga?

The point here is very simple. Running a club also means looking after the balance sheet (especially when you're heavily in debt like West Ham is. You have to do what's best for the club. And I think it's hard to argue that swapping McCartney and Ferdinand for Ilunga and Collins was NOT in the best interest of the club, considering the money raised.

If Curbishley's contract said otherwise, he's entitled to his compensation. But that does not mean his judgment was correct at the time. And next time I'm sure West Ham will be careful to word their contracts differently.

How to show dignity over refereeing errors

The referee made two key mistakes in the AC Milan v Real Madrid game. Pato's goal was disallowed for a non-existent handball and Milan were given a highly dubious penalty (converted by Ronaldinho). 

In this case, you could argue that the refereeing errors canceled each other out (it finished 1-1). But what struck me most was the reaction of the two managers. Leonardo, the Milan boss, said: "I only worry about the things I can control. I can't control the referees, they're human, like me they make mistakes. Maybe he made two mistakes tonight, so what?" Manuel Pellegrini, in charge of Real Madrid, said: "The referee doesn't go in front of the cameras to talk about my mistakes, why should I talk about his? That's the job of the media. To me mistakes are part of the game you can't control, like the wind or the pitch or the rain. Sometimes results are affected, sometimes they are not. Either way, it's beyond our control."

I don't fully agree with the two of them, but it's pretty obvious both Leonardo and Pellegrini are gentlemen. More than a few managers could learn from their behaviour.

Comments

[DR]

Gab, the answer to your Kroenke point is very simple and Richard Scudamore is the man charged with the responsibility to make it happen. Outlaw debt-leveraged takeovers.

Say to any prospective owner of a football club, 'We want to see your money, where you got it from and how you are going to use it to buy the club!' If the answers are unsatisfactory the League bars the acquisition.

Following on from your praise of Randy Lerner, how about a word for the much maligned Doug Ellis, who turned down an extra £20 million for his shareholding from one George Gillett, to accept Lerner's offer as he felt Lerner would look after the club in a way Gillett couldn't.

Lastly Gab, you might be smiling at your Eagles beating up on the G-Men, but remember what happened when they crossed the Silver and Black.

[Clive]

30% is the takeover threshold, not 29.9%.

Small gap but makes a big difference.

[Deptford Del]

Gab,

I was impressed with the referee's decision to give a penalty to Milan. Intentional or not, the passage of the ball was clearly blocked by the defender's arm - surely that constitutes a penalty.

Very impressed with the conduct of both managers went commenting on the ref nonetheless, and what a goal by Pato!

[Ole Gunner]

I certainly am worried about the Kroenke situation.

The current situation is as close to ideal as possible. Nobody owns the club outright.

I suspect that Kroenke would understand that this is true, even from a business perspective. I suspect there will be no takeover.

It's the best way to safeguard the value of his investment. A sustainable company is worth more than one that's not. And we're all seeing how hard it is to exit from an investment in a football club (Gillet & Hicks).

There's certainly the fear that Kroenke would try to acquire the club through debt he dumps on Arsenal's balance sheet.

Hopefully, Arsenal's board will be looking to avoid that and would take measures to prevent it.

As an Arsenal fan, I can only say I don't like the single owner model. Having witnessed my beloved club grow from one of the world's 15 biggest clubs, into one of the world's 5 biggest, without the sponsorship of a benefactor, it will be a huge step back to tying the fate of the club to the whims and fortunes of a single person.

I am worried but hopeful.

[Ali]

Kroenke's not pumping this money in for the fun of it. Heck, Arsenal doesn't even pay a diidend, all profits go back into the business. That was the basis of Arsenal's success, but unfortunately in the age of the billionaire, Arsenal's old money owners are not wealthy enough to ignore the fact that they are sat on a very valuable asset.

Considering the lenghts Arsenal have gone to in order to maintain a financially prudent approach, any debt based takeover would surely be suicide ?

[Pedro]

Surely the 29.9% (or 30%) trigger is just means that he would be obliged to make an offer to the rest of the shareholders (Usmanov (25%), Danny Fiszman (16%) Bracewell-Smith (16%), and the Arsenal Supporters Trust (10% - I believe)) would be under no obligation whatsoever to accept.

This is what makes the Arsenal takeover so different. Abravomic bought from Ken Bates, Lerner from Ellis, Gillet & Hicks from the Moore's and Glazer from Edwards. They were all basically one to one transactions - not so in Arsenal's case.

With 25%, I don't believe for a minute that Usmanov has yet given up on a takeover himself. I think this is likely to be protracted affair. Indeed a standoff between shareholders might end up being the perfect solution.

[Lucas M]

Clive, 29.9% is the highest share you can own without having to oblige a takeover, but by reaching this amount it is a clear indication of the shareholders intentions.

[Gabriele Marcotti]

1. Ali - Well, to be fair to Kroenke we should wait and see what he's planning to do. What would make me very uncomfortable if I were an Arsenal fan is the fact that he hasn't made his intentions clear. He owes Arsenal that, at the very least.
2. Ole Gunner - Yeah, I would add that Arsenal have largely been impeccably run over the past decade and it would be a shame if this model of ownership fell prey to somebody like Kroenke... if he's going to be Hicks/Gillett mark II.
3. Deptford Del - Much agreed. Those are two very classy guys.
4. Clive - Thank you.
5. DR - Kudos to Ellis. Scudamore can't simply draw up laws for the Premier League, he doesn't own it, he simply runs it on behalf of the 20 Premier League clubs. A majority of clubs would have to come out and support such a restriction. And I don't see that happening.
As for my Birds, we'll just have to put a hurtin' on those Cowgirls this weekend...

[Stuart C]

Stop jumping on the badnwagon Gab. Kroenke is now on the board at Arsenal and all indications have been that he will play by the rules set by the other shareholders. He does not have the money to buy the club outright, and from a business perspective, his shares are worth more now than they would be if he owned them all outright. This is just the board making sure any stray shares are not hoovered up by the Uzbeki cretin and are instead acquired by 'friends' of Arsenal. Don't read into this, if Kroenke was going to buy the club, he'd have made his offer by now, not keep upping his stake by minescule amounts.

[Dave]

Re Kroenke:

Worth bearing in mind that we're talking about a man who is married to a woman who owns a major share of a business (Walmart) that generates around a billion dollars in cash *per day*. £460 million is loose change on that scale.

Also worth noting that reaching the 30% threshold doesn't "give him the opportunity" to bid for the rest of the club: it forces him to do so at the same price as his recent purchases. It seems far more likely that Kroenke would like to hold 30-50% of the club as a good long-term investment than that he wants to take control. If he did, he could have made a public offer long ago and been well into the process by now.

Aside from that, there is the issue of whether leveraged buy-outs are a problem. I think it's clear that it's not borrowing that is inherently problematic, but simply poor management of risk - and that's a problem whatever the ownership structure of the club.

Anyway, Man U and Liverpool are not suffering from their debts. The biggest risk to such a geared investment is to the owners' capital, rather than to the business itself. The worst case scenario sees the club suffer from low investment for a couple of seasons, rather than anything more serious. It's often forgotten that the owners of West Ham - who, incidentally, did not buy the club with borrowed money - went bust in just the kind of cataclysmic scenario being raised here. The club doesn't appear to be in dire straits as a result.

One more thing:

"In the real world, when somebody pumps several hundred million into a [business] he might reasonably be expected to be the boss."

Try telling that to Conrad Black.

[Kenny Boy]

Randy Lerner may be a steady hand at the Villa, but over in Ohio, his NFL Cleveland Browns are facing fan protests....so it's not all sugar and spice for the man.

[Gabriele Marcotti]

1. Stuart C - Interesting theory... but why is the Uzbek a "cretin"? And if that really was the Arsenal board's objective, why not funnel those "loose shares" into some kind of shareholder trust vehicle?
2. Dave - Anne Walton is an heir to the Walton fortune, but she's one of many. And, if you read up on Wal-Mart (personally, I loathe Wal-Mart and what it stands for, but Sam Walton autobiography is one of the best and most revealing business books I have ever read) you'll see just how frugal the Waltons are. Wal-Mart may generate a billion dollars in revenue a day, but that's not profit and, more importantly, only a tiny slice of that is Anne Walton's. :And, most of all, it's not Stan Kroenke's, it's his wife's.
I would strongly dispute the fact that United and Liverpool are not suffering because of their debt. A big chunk of United's profits every year goes to service the interest on the debt... what happens if one season they don't qualify for the CL? It's an unhealthy situation for both clubs and it would be a bad situation for Arsenal as well should they ever find themselves in that position.
As for your West Ham example, the club has lost Lucas Neill, James Collins, Lee Bowyer, Craig Bellamy, Bobby Zamora and Anton Ferdinand over the last fifteen motnhs... they are in the relegation zone right now. I would dispute your assertion that "they have not been affected".

[Dave]

As far as Walmart goes, my point was just that Stan Kroenke, or at least his wife, has access to large amounts of cash. No, not the full billion per day, but a fair chunk of 12 billion per year profit - paid out as cash to the shareholders. If Mr K needs to borrow money from anyone, his wife is a prime candidate.

With regard to your fears for Man Utd, consider what position Stan Kroenke would be in if he paid half a billion in cash for Arsenal. Would he then be content simply to own the club at no benefit to himself, or would he expect to take profits? It seems obvious that he'll expect a similar return to any other capital provider - e.g. banks making loans. It's important not to confuse profits with money that needs to be reinvested in the team to sustain its level, but what the owners do with the amount left after that reinvestment is immaterial - what is clear is that if they reinvest the surplus into the playing side, that is effectively outside investment and not something a club should depend on, in my book.

When you look at West Ham, the owners went bankrupt and ownership passed to the banks. The club continued entirely unscathed, although they had to balance the books after a period of ludicrous overspending. Now they've done that, they seem in reasonably good shape, even if they've had a very poor start to the season.

If, in your hypothetical case, Utd fail to qualify for the Champions League, then they've already dropped in quality a huge amount from where they are now. I don't think just one year would cause the ground to collapse from under them, anyway, so we're talking about a sustained and significant loss of quality. Assuming a similar situation to West Ham, the banks and other lenders will take control, and even if there is a slight tightening of belts, United will not lose more than another few places in the league. Basically, in the event that United decline from being one of the strongest clubs in England, they'll become a mid-table side for a couple of seasons. Not great, but not the complete calamity it's made out to be, surely?

The real point, though, is that unless United are run badly, that's simply not going to happen. The quality of the people at the top is the really important part; not the financial structure. Mike Ashley paid cash; Malcolm Glazer bought the club using loans. Who would you rather was running your club?

[Amos]

Stan Kroenke doesn't need 30% to launch a takeover bid for the club. Neither does anybody else. Anyone can make an offer for the shares at anytime. 30% is just the level where you are obliged to make a bid for the rest of the shares at the highest price you have paid in the period prior to acquiring that level. There is no significance in Kroenke getting to 29.6% or 29.9%. He may choose to stop there if he has the security of knowing he can pick up the rest of Fiszmans shares at some point in the future. Effectively he controls the club already.

[Davy G]

Would like to see how much of a gentleman they would have been had one of them lost due to a refereeing error.

[Rhys Jaggar]

My take on the cash vs leveraged debt argument:

1. From the paying customer/fan's perspective, leveraged debt is bad. Because the money they pay in tickets/shirts etc etc not only has to service the natural costs of the business, but also, on top, and only due to the owner's purchase of the club, the interest and capital repayment schedules. Unless the T&Cs of the sale precluded that.
2. From the new owner's point of view, he has three choices:
i. He sees this as an expensive hobby and his purchase price plus ongoing subsidy is his equivalent of fans buying a season ticket, following an initial debenture. This is the Abramovitch model.
ii. He buys the club with cash as a means of securing fans' goodwill and attempts to run the business semi-organically. This is the Lerner model, although attempts to reach the ECL have necessitated significant investments in transfers which may involve loaned moneys....
iii. The traditional LBO. The key question here is the vehicle liable to repay the debt and the security provided against it. This could be the acquired club after acquisition or it could be other personal assets of the purchaser. From the fans' point of view, they can't understand why they should be paying the banks on behalf of the owner. The owner bought the club, so he can service the banks. This is the Glazer model.

The key for fans in model III is: how long are they staying and how do they intend to exit??

If they stay 3 years and do well, then sell out to even richer players, then the debt may get paid off. More likely though, another LBO will have taken place, which effectively means that fans become a perpetual charity vehicle for banks. Man Utd didn't need debt, they were the most profitable sports franchise in the world. The IPO led to the LBO and now they are one of the most indebted franchises in the world.

If they stay longer but don't start paying the debt down, then not only are the customers paying the banks, but the best players start getting sold too to service the debt. The result of which is a gradual decline in revenues as people become less prepared to pay high prices to watch more mediocre players. Not a happy endgame.

If however, the debt taken on is not too high a percentage of the purchase price (e.g. 30 - 50%), and if significant improvements to business performance are achievable (e.g. improving commercial revenues, increasing attendances, improving media deals), then servicing the debt can be achieved through improved performance. Fans won't have a problem with that. If Mr Owner adds X in profits whilst keeping the team successful, and if 3X/4 is paid in interest+debt reduction each year, then the fans can say: this guy has strengthened our club's finances despite taking on debt. Just as Emirates Stadium self-finances the repayment of loans for the mortgage.

I'm not sure whether an example of that final type of LBO exists in football and I don't know exactly what debt:equity ratio would fit a particular club.

But I do know this. A club which doesn't need new debt shouldn't sell out to anyone who expects the fans to subsidise their purchase of the club through interest payments.

And the EPL shouldn't sanction any sales of that nature either.

IMHO.

[John Lines]

Dave said: The quality of the people at the top is the really important part; not the financial structure. Mike Ashley paid cash; Malcolm Glazer bought the club using loans. Who would you rather was running your club?

As a Newcastle season ticket holder, we've had Fat Freddie's loans/ crapulence and Fat Mick's 'prudence'. Neither have worked because the missing ingredient is the autonomy of a genuine and learned football club manager. This reason alone dicates that Villa are doing well, Arsenal will do well and Manchester United are doing very well whilst NUFC have plumbed the depths.

Gab, as for the Pellegrini/ Leonardo comments... all power to these guys. A Kipling poem comes to mind about these two leaders. As a manager at grass roots level (adults and U10's) the ref is best regarded as a part of the field of play to be negotiated. Even the laws of the game suggest this. Had the Sunderland/ Liverpool beachball shot ricocheted in off the referee then it would have stood as the official is 'part of the field of play'. Hearing those two stellar coaches intimate the same gives me renewed faith in the game at the elite level.

[Gabriele Marcotti]

1. Kenny Boy - Yes, and that underscores the fundamental differences of owning an NFL team or owning a PL team and what constitutes a "good" owner.
2. Dave - I think United in mid-table for a couple of years in this day and age WOULD be a complete calamity frankly... No, the team won't go bust or disappear, but if that happens they would need ot spend heavily on the side. And, given the debt, they won't be able to borrow more, the owners will need to spend. Will they want to do so?
3. Rhys Jaggar - Agree 100 percent.
4. Davy G - Well, both HAVE lost games to refereeing errors and both were gentlemen about it.
5. John Lines - Pellegrini is a good coach who may or may not be right for Real Madrid. Leonardo hasn't been in the game long enough to prove if he's any good as a coach. What we do know is that both are great people.

[Sam]

It always makes me laugh how the average fan talks about takeovers. I am a massive Arsenal fan but I know nothing about Kroenke and to be honest I do not care about him.

If he buys the club so be it. As long as he knows that Arsene Wenger is boss he can do what he likes!

[Matt B]

Well Kroenke has bought more shares today and the interesting thing about this purchase is that half of the shares came from Peter Hill-Wood. It seems like Kroenke has a fixed point that he wants to get to and he may be running out of loose shares to hoover up.

I think that the AGM was a wake up call to both Arsenal and Kroenke. I would not be surprised if their main takeaway was that the current situation couldn't continue and it is now time for decisive moves.

I expect a full takeover offer this month.

[Robert]

"he'll have the opportunity to buy up the rest of the shares for around £460 million"
This is actually incorrect. When a bidder gets to 29.9% he is required to make a bid for the remainder of the shares at the highest price he has paid so far. This compulsory bid is no more likely to succeed than a bid launched at any other time - there is no compulsion on anyone to sell.

[J Smith]

Why not bring in a German style 50+1 rule where investors can only purchase 49% of a club's shares. This would be the end of the Glazers/Hick & Gillet etc

[Mik N]

What worries me about the current situation is that Mr. Kroenke intentions aren't clear.
As an investor he may just be purchasing an undervalued asset. The block of shares he has amassed, combined with any of the other blocks amounts to a controlling share.
He could quite as easily become kingmaker, as king. He has no ties to the club, so we just do not know.

My understanding on the takeover rules are that at 29.9% he has to declare his intentions, he can decide not to launch a takeover, then he is only lock out for a period of time, 6 months I believe. There is however nothing stopping him from selling his stake to another investor, even to Mr.Usmanov.

[G London]

do you think it could be possible that kroenke's activities are defensive with regard to usmanov. positioning himself just on the brink of the limit before a take over bid is obliged, nobody is forced to sell but I imagine that quite a few shares would trade hands esp as kroenke has purchased a lot at well over the market value price. however shares can only be purchased after an offer is made. by positioning himself just on the margin he can effectively hold control safe in the knowledge that if usmanov purchases further or threatens him, he can make a couple of additional purchases and then in turn see a large percentage of shares tumble into his lap like dominos.

[D Melbourne]

Arsenal the company, besides not being affected by inter-shareholder indebtedness, has plenty of debt of its own. This was a result in part of the need to finance a new stadium but it also represents an astute financial strategy. There is very little spare debt capacity so Arsenal cannot be used to finance its own takeover by someone using borrowed money that is then refinanced post-takeover by being secured on Arsenal's assets - for those assets are secured already by the club's current debt.

So in that respect it quite different to man U or Liverpool.

[Jack King]

Stan Kroenke:that's a syrup right? It's got to be a syrup. Never trust a man with a syrup.

[John]

I am not sure about the suggestions that people with shares are not obliged to sell.
I had Man. United shares when they were taken over and had to sell mine.
There's little doubt that United were better off prior to the Glazers arrival.
Beware the potential debts Arsenal.

[StanStreason]

If we assume both of the major shareholders are professional investors one owning 29% and one owning 25% then for the right profit one will sell to the other giving effective control at over 50%. At that stage the "winner" will not care too much if no one else sells to them. I bet they are in regular contact playing a game of financial cat and mouse. One of them will be left with more than 50% ownership within a year. Thats why people buy large minority stakes.