Beyond control: Mike Ashley’s brush with the US PP market
Andrew Hollingworth, a portfolio manager at Holland Advisors and shareholder in Sports Direct, has urged Mike Ashley, the sports retailer’s owner, to pay more attention to corporate governance. But had Hollingworth known about the US private placement market’s experience of dealing with Ashley — in this case over debt owed by one of his other businesses, Newcastle United FC — he might have campaigned for it even more strongly.
Hollingworth writes that "to be a [Sports Direct] shareholder in 2019 is to be someone who is backing Mike Ashley and taking the longer-term view."
One encounter that might have proved illustrative to Sports Direct shareholders was Ashley's dealings with institutional investors in the US private placement market more than a decade ago, when he bought Newcastle United, a football club in the northeast of England, from its previous owner, Sir John Hall.
The swift acquisition resulted in a fractious set-to with private placement investors who, unknown to Ashley, held the football club’s debt instruments, and invoked a make-whole option under a change of control clause, forcing Ashley to pay around £47m to them in under three months — something that he had not reckoned on when he bought the club.
Mike Ashley’s Sports Direct has had a rough few weeks. The UK company further delayed the publication of its results last Friday — following a €670m tax bill demanded by the Belgian authorities — while simultaneously announcing that its finance director Jon Kempster will leave the company in September. Grant Thornton, its auditor since 2007, quit on Monday.
Poor financial results, particularly within Sports Direct’s sports retail division, prompted shareholder Hollingworth to write to Ashley to ask him to "resource the corporate parts of [his] company properly," arguing that they help to avoid "unneccessary crises".
Hollingworth referenced Tim Martin, the founder and chairman of pub chain JD Wetherspoon, as someone “hugely involved in the running of the company, but [who] has established a good corporate team who both help him run the company better and deal with the vast majority of investor interactions in a constructive and helpful manner”.
These concerns about Ashley’s business strategy are similar to those of a clutch of institutional investors, that dealt with him when he acquired Newcastle United just over a decade earlier.
Several private debt players have told GlobalCapital that Ashley, on his acquisition of Newcastle United in 2007, eschewed the opportunity for due diligence to buy the club swiftly, closing the deal in just under three days. But Ashley had not known that Newcastle had private placement debt which, after a change of control, could be sold back to the club.
It took just three days in 2007 for Hall to sell his 41.6% stake in Newcastle United to Ashley, one of Britain’s most flamboyant businessmen. Hall, who had been the majority shareholder in the football club since 1992, had been trying to sell his stake for a few years.
Hall had travelled across Europe looking for a buyer for several years, but none could be found.
That is until 2007, when he got a call from an agent in London, who said he had found a buyer for his stake at £1 a share, which is the amount Hall wanted. Hall went down to London for what he thought were preliminary meetings with the buyer, who turned out to be Ashley.
Hall arrived at Ashley’s lawyers’ office in central London, and his team wanted to sign the deal on the spot, according to Hall. He said he asked Ashley about doing due diligence.
Ashley replied: “We don’t want to do due diligence, we want to do the deal,” Hall told ChronicleLive, a local Newcastle news website.
Hall, who had not even packed an overnight bag, stayed in London for three days and the deal was done, putting Ashley on course to own the club in its entirety.
But Newcastle United, which declined to comment for this story, also had debt outstanding. The club’s accounts said it had issued £55m of senior notes with a fixed interest rate of 7.43% back in 1999 via a special purpose vehicle called St James’ Park Finance, to finance a 15,000 seat extension to St James Park, its stadium.
The debt was secured on future income from ticket sales and corporate hospitality receipts and was set to be repaid in annual instalments from 2000 to 2016. According to several private debt bankers and investors, these notes were sold to a clutch of US private placement investors, among them large institutions like M&G and, according to one PP agent, MetLife.
Newcastle was not alone in entering the PP market around then.
England’s football clubs became popular with US PP investors in the 1990s and early 2000s. Teams like Leicester City, Norwich City and Leeds United, as well as Arsenal and Manchester United later on, followed North American sports teams from the National Basketball Association and National Football League into the market for long-dated borrowing at lower interest rates than they would be charged elsewhere.
The NBA itself, both via its parent company and its subsidiary Hardwood Funding, has raised US private placements. The NFL has PPs outstanding, too, in the name of the parent organisation and various funding vehicles.
“They [UK football clubs] were all the rage in the early noughties,” said one PP investor. “But many PP investors including myself underestimated the risk of relegation [from the division they play in that] UK clubs run — and this is where the trouble started.”
Leicester City, for example, received £38m thanks to a US private placement sold to North American academic retirement fund TIAA-CREF in the early 2000s for the construction of its stadium, then called the Walkers Stadium.
However, the year before the East Midlands team were set to start playing at the Walkers, they were relegated from the Premier League. Owing to the loss of income from TV money and debts from the stadium, the club went into administration temporarily, and ownership of the stadium passed to TIAA-CREF.
"If a Premier League team is relegated to the Championship [English football's second tier, to which the bottom three Premier League teams descend at the end of each season], the football club suffers massively,” he added, highlighting Leeds as a particularly painful example.
Leeds United, one of the top English football clubs from the 1970s to the 1990s, reached the semi-finals of Europe's premier club competition, the UEFA Champions League, in the 2000-01 season. But after spending heavily and failing to qualify for the same competition in 2002-03, the club fell out of the Premier League in 2003-04. The club could not repay its debts, and entered administration in May 2007. It has not featured in the top division since.
Investors in its PP fared similarly badly. “The Leeds recovery made it into double digits in terms of percentage, but it was a low recovery,” said the PP investor.
It was in that fateful month of May 2007 that Hall signed his shares over to Ashley, prompting Ashley’s funding vehicle St James’ Holding to make a cash offer for all the remaining shares in Newcastle United. The total was valued at £131m.
But the change of ownership offered Newcastle United's PP investors a chance to duck out of an investment that Leeds United had shown could have a big downside. By exercising their change of control option they could sell their debt back to the club and be made whole.
A make-whole clause means the borrower, if buying back debt or calling it ahead of maturity, pays the investors according to an agreed formula to compensate them for the coupon payments they would otherwise miss out on.
“Almost all PP issues will have a change of control definition whereby if the owner moves on to something else, you can offer the notes [back to the issuer] at par or make-whole,” said one US PP agent. “This protects private placement investors from credit deterioration, and with Ashley taking charge and the sector falling from grace this was certainly the route investors needed to get out.”
Someone's cursing, Lord
According to one person familiar with the situation, when Ashley heard about the make-whole option, and the private placement investors’ intention to exercise it, he was incandescent.
“The financial director of Newcastle at the time passed on the message from Mike Ashley that the private placement holders 'can fuck off',” said one source familiar with the situation. “It’s safe to say they didn’t all hold hands and sing Kumbaya.”
Another source with knowledge of the situation said that the fact of the change of ownership was not the only reason for investors calling time on the investment. “It was a fairly toxic sector, irrespective of who was coming in,” said one investor. “There was clearly institutional pressure on the investor side to pull back from the sector — that’s the main reason the investors invoked the clause.”
In September 2007 Newcastle United was forced to repay £42.725m to the institutional investors, plus a 10% make-whole of £4.273m — totalling roughly £47m.
Ashley in his first public statement after acquiring Newcastle, noted that there was much more debt than he had expected, but said: "There was no time to do the usual due diligence on the deal because I had to move so quickly. So I paid £140m for the club with the expectation that there was a debt of £70m. Actually it was around £100m so there was suddenly an extra £30m to find. But I just thought: 'Shut up about it'. I'm a big boy and I didn't cry.”
In some respects, this is a unique tale in the private placement market, and unlikely to be repeated. But it has stuck in the minds of many PP investors, and 12 years on continues to fuel scepticism of UK football clubs as private debt issuers.
Mike Ashley’s public relations agency Keith Bishop Associates did not respond for comment. Sports Direct did not respond for comment.