IPO Eagle Football Holdings explainer
Textor has mentioned going public as his ambition but what does that mean?
Initial Public Offering (IPO) is the first time a private company shares are traded on a stock exchange. Commonly this is when private owners cash out and make large amounts of money. Marc Zuckerberg sold over $1 billion in stock in Facebook IPO back in 2012. They don't have to cash out; the cash could be used to reinvest in the company. Eagles holding are not at this stage yet.
To be a public company there are a lot of rules and regulations. It's a very time-consuming and difficult process. For normal companies, this increases the public scrutiny. Not sure that would be the case for this group. Normally they will use an investment bank to underwrite to consult on the process.
Pre IPO
It’s been reported that Textor is preparing for a Pre IPO. This is where a company that wants to go public sells a chunk of shares before the offering. These are limited to high-net-worth individuals who will be hoping the price per share will be bigger once the company goes public.
A good example of the whole process is Beyond Meat. Founded in 2009, Pre IPO at $25 per share in May 2019, and then the actual IPO in June of that year was $160 per share.
There is no guarantee that the fundraising for the IPO to actually will happen. It’s possible that they will postpone or cancel the offering. In this case, the pre-IPO investors would still owe their shareholding but it’s less easily traded as it remains private.
Too soon for IPO?
The theory is that having several clubs in areas with lots of talented youngest and letting them move freely between the clubs to develop their talents. The clubs share information on best processes and business ideas. This would make the clubs within the group worth more as a collective than individual clubs.
This would be a long-term strategy. If you going public you want to have some good examples for investors. That said Lyon has got O’Brien from Palace playing in central defence and played for RWDM last season on loan. They signed Jeffinho last January from Botafogo. He has played in 19 games for Lyon and is 23 years old. Rumors are that Lyon will sign Adryelson and Lucas Perri this January. But it's still early days and Lyon is struggling.
If they can persuade the investors the process is already working and it removes some of the risk. Less risk should mean investors will pay a higher price.
Most football clubs are trophy assets. This a company that is rare and in high demand. It increases your profile being an owner of the football team. Part of being publicly traded means there are lots of small shareholders. They don't get the same effect on the smaller scale. That said if branded well there could be some fans that will buy shares and display the share certificate. That might happen for the individual clubs but not sure that will happen for a group with lots of teams.
Counterpoint
A rising tide lifts all boats. This means that investors might just be expecting the value of football clubs will increase as the industry becomes more valuable. The athletic reported that 777 a rival group was forecasting a doubling of rights in the next decade. That might be overly optimistic. But predictions are very difficult. Ten years ago I thought that Premier League was close to the maximum it could get and it's growing.
One of the ideas mentioned that Premier League football is recession poth might be very appealing to some investors. If you’re running a hedge fund and you have lots of investments in companies that suffer in a recession. Like a recruitment firm. One of the first areas companies cut costs is recruitment it’s a good indicator if a country is going into a recession. So you can reduce that risk by investing in other companies that do well or retrain value in a recession. I am a bit skeptical that footballs do that but long TV contracts can pretext clubs from temporary bumps in the market. As Premier League wasn't affected much by joining the dot com crash and did well in the COVID years compared to other leagues. Palace lost £25 million due to COVID. But teams like Lyon that rely on gate money haven't recovered as well.
NYSX
Textor has mentioned his preference for the New York Stock Exchange. There are a lot of requirements before a club can list on the New York Stock Exchange part of this is that they only want the high-quality securities to be traded on their exchange. Generally speaking, these requirements are around the size of markets and market share of the company. To be a part of these Stock Exchanges is a badge of honour for the companies. It’s important for Stock Exchange’s image that they keep a high bar. This includes delisting companies that no longer meet the requirements.
For geeks like me; it’s great as numbers need to be released to the market regularly. If you noticed Manchester United numbers are out each quarter same as Lyon. Lyon has been listed under the name Olympique Lyonnais Groupe on Euronext Paris. They went public on February 2007. This listed 28% of its capital on the stock market but only 17% of its voting rights. These were listed as €12 per share but are now only worth €2 per share.
Manchester United
They had their IPO in August 2012. Selling $14 per share and raising $233 million. This gave them a market value of around $2.3 billion. The Market Cap for UTD is around $3 billion but as recently as July 22 it was $1.75 billion and $4.29 billion on February 23. The current share price is around $19 per share. This can change suddenly especially if some new gossip comes out.
Wait they are listed, I thought the Glazers owned it?
It’s both. On the New York Stock Exchange with Type A shares Glazers own all the Type B shares. Type A has one vote per share and Type B has ten votes per share. So Glazers had overall control as they have more than 50% of the vote. So Textor could use the IPO to cash out or to gain capital to reinvest in the group or a bit of both.
Why do people invest without control?
They are riding the wave. Often they want to invest because they trust management to continue the work that got them interested in investing in the first place. The cult/vibe of CEO can be the PR that sells investors in the project. It might not even be what the actual company is doing but the investors expect that industry to do well so they just going to invest.
Private Equity view
Josh Harris a share holder in Palace explains his sports investments in a bloomberg interview in 2017.
“As an investor, I try to figure out what is interesting to own. For me high single-digit growth and a little bit of leverage for an individual you make a great low double-digit return over a long long time. That might not be perfect for private equity where you have to make more than. But for an individual, it’s a fantastic thing to own.”
This is six years old but I think the point remains valid that the growth might be worth the risk for traditional private equity. Only recently private equity have been interested in football clubs. With Clear Lake Capital recently owning Chelsea but it might not just be profit motives. It’s possible that these funds see investing in football clubs as a way to increase their profile and almost be advertising.
$200m Pre IPO
Reported on Bloomberg that they looking for $200m in investment for the IPO. This could be used to fund Lyon's losses. In the last two seasons they have lost €99m and €55m. Or they could add another club to the group. There have been rumors that Textor wants to buy G.D. Estoril from Blitzer. They are a Portuguese top-flight team. This could be a key place for young Brazilian players to move to develop and get used to Europe. Portugal shares a lot with Brazilian culture. Textor has hired a few Portuguese managers.
Issues with Lyon's finances
In the summer DNCG where not happy with the club’s financial plans. French football’s financial watchdog has the power to religate teams. Sochaux this summer went down to 3rd tier due to not having enough cash according to DNCG. He is complaining that he is being treated differently from the previous chairman. That chairman most likely had a working relationship. Feel like the DNCG starting a more general crackdown all over French Football. Last season Bordeaux was already relegated and almost went down an extra division due to not being able to cover the cost of relegation. They needed €40m which they eventually got. The relegation was overturned in appeal. So this season they played in the 2nd tier.
Lyon is one of the biggest clubs in France. In 21-22 season the revenue was €214 million. In the accounts for reaching the Europa League quarter-final, they made €11millioms for ticket and TV deals & other marketing rights €18.9 million. It would be likely sponsorship contracts would be linked to them playing in Europe. Not being in Europe this season is 20% drop in revenue before player trading. While they look like they are in a relegation fight currently. This income will not be back soon.
Playing trading is key for Lyon. Last two seasons they had income totaled €182 million. If they are not playing in Europe it's harder to get the big fees. As the players aren't tested against high-level opposition as regularly.
Ligue de Football Professionnel is struggling to sell the domestic rights to Ligue 1. They held an auction hoping to get a bidding war but none of the bids met expectations. League around Europe are hoping for bigger TV deals to get closer to the Premier League but it's not happening.
So spending pre-IPO funds to get Lyon into the European spots would be tempting. But those funds don't guarantee European football in a couple of season’s time.
DNCG issues
Part of their focus from DNCG might be due to debt in the holding company. It was reported in L’Équipe before the takeover that Ayes Manager (global alternative investment manager) loaned the holding company USD $275 million with no required interest payments for eight years. Interest rates for this could be pretty high. Banks don’t like to give football clubs loans as it’s too high risk for them. It could be really high interest rate as it’s a hedge fund at the same time Textor could have mate rates. The fed interest rate is 5.5%. So borrowing $275m would add a minimum $15m to the bill in eight years’ time. Based on the risk it’s likely to be more than this.
Debt in itself isn't a bad thing. Especially when using debt to buy assets that generate cash. It's questionable if these football clubs that need constant cash can become cash generators. It's servicing the debt that is the main issue. According to that article, they don't need to make payments for eight years.
These reports were before the purchase. Recently there have been reports in the FT. Ares wanted Eagles Holdings to sell their shares in Palace so they could put money into Chelsea. There are no rules against leading funds to multiple teams. For example, Macquarie loaned funds to Palace secured on Wan Bisisska's second payment from Manchester United. This is a common loan service Macquarie provides to Football clubs. Ares has since loaned Chelsea £500 million. Worth adding this could be PR for Ares. They can boast about being partners with these teams.
There was also a bridging loan for $130 million from Ares in the Le Eq article. Bridging loans are often used to borrow money for purchase while you sell another asset. If you are very wealthy it’s not unusual to buy a home and keep your old one on a bridging loan while you hire a team to do up the new home and then sell the old home. This is most likely paid off by Textor when he sold another or a couple of assets.
Current Structure
From the L’Équipe article, it mentioned that Iconic Sports invested $75 million (25%) and Elmwood Partners invested $25 million (6%). With the rest being owned by Textor. This matches Eagle Football Holdings which states in the timeline that capital from Textor, Ares Management Corporation, Iconic Sports, and Elmwood Partners set up the company.
At companies house, it has a confirmation statement as of September 23 the below spilt for ordinary shareholders.
Easier for Textor to cash out of Palace?
Thanks to Sandy Weller (@sandyweller7) for the question on Twitter. Eagle Football Holdings could sell and buy shares in clubs before or after the IPO. The shares being public shouldn’t affect them adding and getting rid of any clubs. I would assume they will have to go through more paperwork and be a bit more open. Rumors can have a big effect on share price so would have to be careful.
Back to the question, Palace would remain a private company. So if Eagle Holdings sold their shares in Palace. The Palace board would have the option to accept or reject the transfer. Below is a screenshot from the Palace’s Memorandum and Articles of Association (published on companies house). When looking for this I saw the clause about Eagle shareholding. So it looks like Palace’s current shareholder can veto any person buying shares in Eagle Holdings. If Textor wanted to sell his 65% he would need approval from Palace.
How would this work after an IPO?
I am not sure it would. As part of being public, shares are freely traded otherwise they might as well still be private. Part of the reason companies go through the hassle is to have liquidity in the shares. I would assume if Palace is part of the group when they go public they would look to have a deal that would mean they remove the above clauses. They could have shares like Manchester United with the class A shares only having 1 vote per share and class B having 10 votes per share. So the new shares might not have much of the voting rights and Textor would always have control.
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