Vote to authorise purchase of Ebbsfleet Utd FC
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A message from Will Brooks, the founder of MyFootballClub to the members of the MyFootballClub Society Limited (15 January 2008):
The following article was written by our Legal Team.
We are delighted to present members with details of My Football Club Society Limited's agreement to purchase a 75% controlling stake in Ebbsfleet United Football Club.
This deal is subject to members' ratification. This vote will close in seven day's time at 12.00pm on January 23nd, with the result published immediately afterwards. Should the majority be in favour, My Football Club Society Limited will become the 75 per cent majority owner of Ebbsfleet United Football Club subject only to a shareholder's vote which will, in effect, be a formality for reasons outlined below.
Legally we are unable to publish full due diligence and transaction documents. The Society instructed DLA Piper to carry out this work on it's behalf. DLA are a trusted and leading global law firm and we have paid for their services. We have also employed an accountancy firm to carry out financial due diligence.
Due to confidentiality, we are unable to go in to an more detail. However, the following description of the deal has been agreed by both parties, and we believe it gives members a very good understanding of the proposed transaction.
There's a short summary at the end of this article.
Background
The legal and web team have undertaken an extensive search over the last few months. As mentioned previously, we were approached by, and approached ourselves, numerous clubs in Division Two, the Conference and the Conference North and South divisions. As with any negotiation and due diligence process, trying to reach a deal can be a long and difficult process. Where a club was popular with members, and the fundamentals looked good, we soon found that there were other significant problems that affected the club, or the price that was being quoted was simply too high and too unrealistic (even for clubs that were making a substantial loss).
Where clubs were not crossed off the list after initial consideration, we did hold more detailed discussions, and there eventually emerged three front runners including Ebbsfleet United (the three front runners did not include Halifax, where the club's approach, and the subsequent process, have been well documented elsewhere).
Unfortunately, because of issues with confidentiality, we cannot disclose the identities of the two other clubs involved, or details of the negotiations. However, we can say that one of the three would have been far more expensive than Ebbsfleet, and the other was considerably cheaper. The former would have been too much of a gamble, and relied on a very significant upturn in membership to work, whilst the latter was eventually discounted on the basis of ongoing issues with the stadium.
Of the three, Ebbsfleet emerged as the outstanding candidate, by some distance.
It wasn't just the fact that the price was more realistic than a lot of the other clubs we contacted, it was also that there were so many huge positives, and the more we saw, the more it seemed like the natural choice.
The plus points included:
i) Availability - the directors of the club saw the huge potential of the MyFootballClub website, and understood the unique opportunities it offered to their club. The manager was also prepared to work with the new scheme, aware of the benefits it could bring. Both of these factors were invaluable.
ii) Affordability - the investment the Society will be required to make will be spread out over two years, which gives us more flexibility for player purchases etc. in the first year. It means that the club is affordable, and allows us to make a real difference to the club early on.
iii) League position and cup - the club are doing well in the Conference. Three points off the play-off places, there is a chance of promotion via a Wembley play-off final, particularly if we can strengthen the squad following the acquisition. The club is also in the last 16 of the FA Trophy which also has a Wembley final.
iv) Ground - the ground is small, but has bags of character. And whilst the gates are relatively low, we feel that it would be a good challenge for members to try and get them up. Whilst the ground is leased, the rent for the ground is low, and there are 18 years left unexpired on the lease. The ground can apparently be fairly easily upgraded to league standard if the club is promoted.
v) Potential for new ground - the fact that the local area is being re-developed means that there is a good prospect that a new stadium will be built for the club, free of charge.
vi) The Club has a long and proud history, but the recent name change and the new station is part of a new era which fits in with the new and revolutionary MyFootballClub model.
vii) There is a thriving youth section: 4 players in the first team squad have qualified through the youth team ranks.
viii) Transport links - Ebbsfleet Station opened in November 2007 for international travel to and from the continent, and in 2009 a domestic service will start running from London to Ebbsfleet. When the domestic service opens, the journey time from London to Ebbsfleet will be 17 minutes. Being 17 minutes from St. Pancras will be helpful for members travelling by train from the North and Midlands. The stadium is also close to the M25, and Gatwick Airport is 40 minutes away by car.
ix) Potential - the club is bang in the middle of the Thames Gateway re-development, which is focused around the Olympic site. In the area around Ebbsfleet International station, over 790,000 m² (8.5 million sq ft) of mixed-use development is planned - including housing, retail, residential, hotel and leisure sites. This should increase the local population substantially, leading to increased support for the club, and bring in new business to the area, leading to increased sponsorship opportunities.
There follows some more detail on the proposed transaction, and a conclusion.
Contents |
[edit] 1.The deal structure
Once we had identified the club as the number one target, there followed a period of intense negotiation. The target group is comprised of three companies: Ebbsfleet United Football Club Limited (the Club), Fleet Leisure Limited (Leisure) and Fleet Group Development Limited (Developments).
Ebbsfleet United Football Club Limited owns and controls the football operations. In other words, they own the player contracts, the FA Registration, and the lease of the ground.
Leisure has a long term lease of an 11 and a half acre site near the ground, which the club uses to train on, but which is also used by a number of other local teams. There are also other sporting facilities at the Fleet Leisure site, including tennis courts, and a large function room, which can host wedding receptions and similar events.
Developments is involved in the possible construction of a new stadium for the Club. That company has spent many months negotiating with a potential developer, and is to continue doing so in an attempt to get a new ground built for the club as part of the re-development of the area. Those discussions are, and remain, highly confidential. We are therefore not allowed to disclose any details of the proposed scheme.
The price of the whole group would have been prohibitively high. There is often a lot of value in training grounds of football clubs, because they have not been built on, and offer the greatest scope for re-development uplift. In this case the site was unusually large, and included other facilities. Developments was also involved in development activity, which was not the primary focus of the football club.
We therefore needed to find a way where we could own the Club without the cost and difficulty associated with owning companies carrying on related but also additional business. In other words, we needed to split off Leisure and Developments (to the extent we could do so) whilst retaining the right to use the training facilities and ensuring that Developments would continue to work to try and get a new stadium.
We considered a large number of alternate acquisition structures where this could be achieved with DLA Piper (who had been retained on the due diligence side).
The eventual solution sounds complicated, but was in fact by far the simplest and quickest: namely, that we create new classes of shares in the Club, with different rights.
Three new classes of shares are to be created: A shares, B shares, and C shares. These will replace the existing shares. The Society will acquire the A shares and the current shareholders of the Club will own the B shares and the C shares.
In essence, the class A and B shares relate to the business of the football club itself, and the Class C shares allow the holders of those shares to control the Leisure and Developments subsidiaries, and to receive dividends from those subsidiaries. The A and B shares carry slightly different rights - the B shareholders (ie. the current shareholders of the Club) have the right to control certain decisions which would impact on them, but otherwise the A shareholders (ie. the Society) will control the appointment of the A directors (who will have all requisite powers) and voting at shareholder's meetings, and the control rights that the A shareholders have are such that the Myfootballclub model will be able to operate effectively.
For the legally minded amongst you, the B shareholders have a veto over the following decisions of the Club: (i) any material change in the nature of its business; (ii) declaring or paying any dividend or making any other distribution otherwise than in accordance with the articles of association or the new shareholders' agreement that will be entered into; (iii) commencing any action for its winding-up or dissolution or the making of an administration order or a composition or arrangement with its creditors, unless the Club is advised to do so by a licensed insolvency practitioner; (iv) disposing of its leasehold interest under the lease of Northfleet Football Ground; (v) disposing of or creating any mortgage, charge or other encumbrance in respect of its shares in the subsidiaries; (vi) consolidating, subdividing or converting any of its share capital or issuing any new shares in its capital; or (vii) making any amendment to its articles of association. There will also be a restriction on the Club incurring indebtedness over a certain threshold without the consent of the B shareholders, such consent not to be unreasonably withheld or delayed. All other decisions of the Club, including the entering into and terminating of player contracts, can be taken by the A Shareholders acting alone.
The effect of this structure is that the Society, effectively, has 75 per cent of the shares and voting rights in relation to the Club's football operations, and the existing shareholders retain 25 per cent of such share and voting rights (subject to the shareholders' agreement, and the veto rights referred to above).
The Society will have no rights to control or receive any moneys (dividends) from the Leisure or the Developments subsidiaries, which will only be paid to the existing shareholders (as owner of the C Shares). Save only in limited and unlikely circumstances, the Club will also not be liable for any new liabilities those subsidiaries may incur (since those companies are limited liability companies - literally, the liability of the parent (the Club) will be limited to the amount that it has already paid to the subsidiaries for its shares in the subsidiaries). In the unlikely event that the Club is found liable for the debts of its subsidiaries, we have negotiated an indemnity in the shareholders' agreement pursuant to which the existing principal shareholders in the Club have agreed to indemnify the Society for any losses it suffers as a result of holding shares in the subsidiaries. For the avoidance of doubt, the Society will not therefore be liable for any new debts incurred by the two subsidiaries. We feel that this is important in order for members to be able to concentrate on the football side of the group. It was also essential in order to make the Club affordable.
Any insolvency of the subsidiaries should not therefore lead to the insolvency of the Club.
The proposed changes to the structure are shown in the following diagrams.
The investment in the Club is being done by way of a subscription agreement for the acquisition of the new A shares by the Society, which contains certain warranties and indemnities that are being given to the Society by the existing principal shareholders in the Club. There are limitations on the amount that can be claimed under those warranties, as with any such agreement. The warranties are in addition to the protection afforded by the legal and financial due diligence which has been carried out on behalf of the Society.
This means that we are not "buying" the assets in the Club, or the shares in the Club, but rather being granted new shares (ie. the A shares) in return for new money.
[edit] 2. The price
The total subscription price is approximately GBP635,000, spread over 2 years. These subscription monies are to be used to repay debts of the group.
We will subscribe for GBP300,000 and an additional Sterling amount which is equivalent to Euros 130,000 at completion (the actual amount may vary, depending on fluctuations in the exchange rate between signing and completion). We have assumed for the purposes of this report that the subscription monies due on completion will be GBP400,000 in total (ie. GBP300,000 plus GBP100,000, being the anticipated approximate Sterling equivalent of Euros 130,000).
The balance of GBP235,000 is to be subscribed for in three instalments.
The first is due within 30 days of the date which is 12 months from the date of completion, and is for GBP125,000. The second is due within 30 days of the date which is 24 months after the date of completion, and is for GBP40,000.
The debts that are to be repaid from the subscription monies include all of the debts owed by the Club, and the timing and payment of the third instalment of GBP70,000 is not fixed but will be paid as and when needed to pay off debts of the group that will remain outstanding after completion, which will include debts of the Club under a hire purchase agreement.
The Club will therefore not have any outstanding loans following repayment of those loans from the subscription monies on the dates referred to above, and save for the GBP70,000 of continuing loans, which will be paid when due. This should put the Club on a more secure financial footing going forward. The GBP70,000 of loans requires regular monthly payments to be made.
[edit] 3. Other terms
[edit] i) The option
The Society is to be granted an option from existing shareholders over the vast majority of the B shares in the Club. If and when acquired by the Society under this option, the B shares will automatically become A shares. This option can be exercised at a price of 20.87197 pence per share, and can be exercised for a period of 5 years from the date of completion, after which time it will expire. We will not be granted the option in relation to all of the remaining shares in the Club, since not all minority shareholders can be found, or some shareholders may not agree to the option. In any event, we have no intention of seeking to acquire the shares owned by the Gravesend and Northfleet Supporters Trust (being the Supporters' Trust for the Club), as our Society shares similar not for profit motives. However, the percentage of remaining shares that is not covered by the option will be small.
The benefit of the option cannot be assigned, however the existing shareholders can transfer their shares, subject always to the option remaining in place over those shares.
[edit] ii) Right to use the Training Ground
Leisure will grant the Club a right to use the training ground to train on for the next 25 years. The Club are to make a payment of approximately GBP48,000 in the first year for the use of the pitch and other associated facilities. The majority of this payment (GBP40,000) will be fixed for 13 years, whilst the remainder (GBP8,000) will be subject to increases in line with the increases in RPI over the term of the agreement. After 13 years, the payments due will decrease by GBP40,000 per annum.
The training ground is crucial for the playing staff. The football club's training ground comprises a very important part of the infrastructure. After all, players and the coaching staff are at Stonebridge Road approximately once a fortnight, whereas they are at the training ground around five days a week for approximately 46 weeks of the year.
Members of the local community use the Leisure facilities, as well as other local football teams, the ladies team and the youth team. The rent the Club is paying should allow Leisure to operate on a more sustainable basis going forward (they have been making an operating loss, historically), and should allow the local community, with whom we hope to forge strong links, to continue to benefit from those facilities.
Members will also be able to go and watch the first team train at the Leisure facilities.
[edit] iii) Agreement with Developments
Developments will continue to try and secure a new stadium for the Club in connection with the re-development of the area. A three year consultancy agreement has been entered into, where the Club agrees to pay GBP135 per hour for consultancy services, subject to annual review. If the Club decides that the proposed project is not worth continuing with on each annual review, then it can terminate the arrangement.
The agreement is subject to a cap of GBP40,000 per year. Any work carried out which is in excess of that cap will not be paid for by the Club.
[edit] 4. Ongoing financial viability
Prior to takeover, the monthly trading losses of the Club (without any additional income) were somewhere between GBP26,000 and GBP28,000 (on the assumption that the Club loses every cup game). This deficit is largely down to funding a playing staff capable of challenging for promotion to the Football League. We would like to report that during our financial due diligence we found the club's day to day financial management generally to be in good order (ie. VAT and PAYE were up to date, which is not the case with a lot of clubs). Clearly, however, the Club could only continue to fund the ongoing deficit through director's and others loans.
We are confident that the MyFootballClub model is more than capable of reversing this situation. We expect an increase in merchandise sales, advertising revenue, sponsorship revenue, dedicated TV channel income, increased gates, and other income. And taking account of the number of members whom (based on current sign up rates) are likely to sign up daily throughout year one, the risk of not being able to fund any deficit until the end of January 2009 (when renewals of membership are due) appears remote.
However, as with any football club, there is no guarantee that the business will remain solvent. The continued financial viability of the club will be dependent, amongst other things, on gates, other club revenue, and the extent to which the Society can fund any shortfall. It will also depend on how well the Club is run by the Chief Executive, in consultation with members.
We will therefore need to ensure that we all work hard in the first year to maximise revenue of the Club, allowing it to go into the new year in 2009 with the prospect of a new rail link, massive new development locally, and significant increases in revenue which would become available for players.
The Society and football club should be able to sustain a considerable drop in membership in year two. However, extending your membership beyond year one is clearly very important for the success of our Society and the football club. And if members can afford to, we would urge them to extend their membership now. Don't forget that the vast majority of the purchase consideration is being spent in year one.
At this level, it is relatively rare to pay a premium for players. Players are often retained on relatively short term contracts (of a year or less), which means that any liabilities for wages are relatively short term.
On that basis, and in view of the additional income that the Society brings, we are of the view that the prospects of the Club going forward are stable, and that the moneys which are being paid are affordable.
[edit] 5. The vote
A circular has been or will be sent by the Club to some 250 existing shareholders explaining the proposed transaction, and the changes that will need to be made to the articles of association of the Club. Legal process dictates that an EGM of the existing shareholders will take place not less than 21 days after the FA have approved the proposed amendments to the articles (this process is ongoing). However, because shareholders who currently hold in excess of 75% of shares have signed irrevocable undertakings to vote their shares in favour of the proposed transaction, the deal is 'unstoppable' by the shareholders and money can be injected into the club in January. Technically, completion will only occur after the EGM (because the EGM will need to be held first, and the proposed transaction will need to be discussed and voted on by existing shareholders), but the fact that "irrevocables" have been signed means that more than 75% of the shareholders (the level of shareholder approval that is required in order to carry the vote) have already agreed to the transaction, and that agreement cannot be changed or revoked.
[edit] 6. Post takeover
You will notice a secondary vote on the site.
Assuming members agree to buy Ebbsfleet United, members also need to decide whether to enable Liam Daish to complete activity he has planned during the January transfer window. It's possible that Liam will want to secure a number of the current players on longer contracts. He may also wish to bring in a couple of fresh faces (that he and his scouts have been looking at during the first half of the season). The second vote allows Liam to do this.
We feel that it's important that Liam receives members' support, because he himself has been very supportive of the members and MyFootballClub during the period up to takeover. He has also been doing a great job with the team currently sitting just outside the play-off places. We therefore think that members should back him to carry out this relatively limited transfer activity in January. Going forward, the process will obviously evolve, and members will be more involved in decisions relating to transfers and players.
In terms of the team selection process, this will take place after members have had the opportunity to familiarise themselves with the squad. To make this possible, the site will carry free match highlights (including key passages of play and individual player highlights) and in-depth player statistic and analysis. We anticipate the first team selection will take place in March 2008.
In February and March 2008, we aim to start the process of electing the Society Board.
We will also need to employ a Chief Executive for the football club. Again, members will have the final say on who is appointed - there will be an application and interview process, following which members will be presented with a shortlist of candidates, and asked to vote on which one should be employed by the Club. There will also be an advisory committee, made up of past directors of the Club (to provide continuity). The composition of the advisory committee can change over time, and will be controlled by the Chief Executive and the A shareholders.
As part of the takeover, it is proposed that Jason Botley stands down as Chairman, and that Brian Kilcullen takes over as interim Chairman. Jason will continue to be on hand, however, Brian will perform many of the tasks associated with a Chief Executive role. Brian has had more involvement with running the club recently, and will continue to run it on a day to day basis, until a new Chief Executive is found (see above).
We will also replace the Chairman, as and when a new Chairman is identified.
Liam and his assistant's contracts are being extended by a year, to the end of the 2008/9 season, as part of the deal.
[edit] 7. Conclusion
This article may seem complicated in parts. That's because the process of buying a company is not like buying a house - there is a lot more negotiation of price, and other terms, as the parties have an ongoing relationship following completion. However, the fact that the transaction seems complicated should not put you off: we have obtained legal advice, carried out financial and legal due diligence, and generally sought to ensure that we got the best possible deal for members. This has entailed months of hard work, of negotiation, of train journeys to various parts of the country, and at the end of that process we have found a club which we believe can have a great future, and at a price we can afford.
It's not possible to summarise every term of every document, but this summary does provide a lot of detail about the deal. It's also not possible to disclose the transaction documents to members, because there are confidentiality provisions in the documents (as is standard), but we believe that this article provides a good snapshot of the major points, and will allow members to make an informed decision.
We are confident that this is an excellent deal for members and the football club, offering Ebbsfleet United a platform from which to strengthen both on and off the pitch. Around 5,500 members have already voted for Ebbsfleet United (they stand number 1 in the most voted for list) and some 12,000 have expressed no club preference. However we believe that this is the best deal for all members.
There has also been an extremely positive reaction to Ebbsfleet United on the forums since the announcement on 13 November 2007.
We feel that if the deal is not completed, then this may be damaging both to the football club and to our venture's credibility.
We are also of the view that we would be unlikely to find such an attractive proposition before our self-imposed deadline of 1 August 2008, and we will need to incur significant further transaction costs, eating into our budget.
This has been a long and difficult process for us - we have worked extremely hard to get where we have, and the things that we have achieved in the past few months have been significant, and they were made possible by members who had faith in the vision that we had.
The most exciting phase is ahead of us - the challenge of strengthening Ebbsfleet on and off the pitch and creating sporting history together.
However, the members should obviously have the final say about whether we proceed with the transaction, because that is in the spirit of the website, and we have also agreed that we would take into account the views of members.
All MyFootballClub members have been emailed directing them to the terms of the deal and the ratification vote. We are also confident of worldwide press coverage alerting them to the proposed vote. We therefore believe that members are being given enough time to read this document and come to a conclusion - it is important that the takeover proceeds as quickly as possible, so that we can get on with the process of running the club, and so that we can make use of the January transfer window.
If there is a yes vote, then the Society will donate monies to the Club to allow it to meet the January deficit, and in order to allow the Club to sign players. The subscription monies will then be paid as and when the Agreement becomes unconditional (in other words, once the EGM has taken place).
It's important that when members discuss the proposed takeover of the Club, the debate focuses on whether Ebbsfleet is the right club at the right price, not whether the price could be improved or the deal structured differently. The Society has paid a considerable sum for financial and legal due diligence and for DLA Piper to agree a structure for the deal. This is the only deal on the table, and it can't be changed.
The Forum Team has therefore been asked to close threads which become wholly focussed on the deal's structure, and whether the deal could have been structured differently, particularly where those threads are inaccurate or misleading.
[edit] Summary
Having spent five and a half months meeting with and doing various degrees of due diligence on 12 football clubs, The Web Team and Legal Team believe that Ebbsfleet United is an ideal proposition for what MyFootballClub members have set out to achieve, and is the best deal out there.
In addition, over the last two months, Ebbsfleet United and its supporters have made MyFootballClub members feel extremely welcome.
A 'no' vote would be extremely damaging to EUFC. And having spent tens of thousands of pounds on financial and legal due diligence, it would seriously damage MyFootballClub too.
Members now have a exciting opportunity to purchase a football club that stands 8th in the Conference, is still in the FA Trophy and Setanta Shield, and has won its last four matches. We believe it would be extremely unlikely we could find such an attractive proposition before the 1 August 2008 deadline and within our budget.
