The Value of Rangers
- 09 October 2013
What value would you put right now on Rangers? And before, you answer with Mastercard's "priceless" I am talking about the financial worth of the business that now runs the Rangers Football Club – Rangers International Football Club plc.
Daft question you might say. Rangers is a listed plc trading on the AIM market and the market sets the value. True up to a point and if I was writing a cheque right now to buy a 100% holding it would have to say £31,000,000 minus loose change. That cheque would bounce by the way.
But market prices are only a guide and not always right. So the question still stands – what value would you put on Rangers?. I don't know your answer, but I've been looking at the recently published annual accounts and coming up with a few of my own. Much good and commendable commentary on the annual accounts has been produced in the last couple of days. Those more expert than I have laid bare some of the key facts about the operating losses, the high costs and the downright suicidal and unjustified bonuses.
But in all of that I have seen very little comment and observation about another fact from the accounts. In the 13th month period to 30th June 2013 Rangers made a profit. Yes a profit. And if you don't believe me here it is reported in the Consolidated Income Statement (on page 22):
I know a few accountants. Fine people. But what trickery is this. A business that generates revenue of £19.7m, spends£33.7m, loses £14.4m and yet still reports a post tax profits £1.2m, £0.95m of which is attributable to the owners of the Company (i.e us shareholders).
The answer to this conundrum is relevant to my first question about what is the value of Rangers. Sitting pretty in that Income statement is a whopping £20. 465 million for something called Release of Negative Goodwill.
Goodwill in business is often termed an intangible asset. It is often reflected in paying more for a business than would otherwise be justified by its tangible assets. So when Charles Green and chums bought the assets and business of Rangers they didn't pay over the odds – a premium for the goodwill associated with the Rangers brand - , instead they paid way under the odds. To the tune of £20.465 million according to the accounts.
Let me be clear there is nothing underhand about this. GreenCo paid £5.5million for Rangers because it was a distressed asset sale and no-one according to Duff & Phelps was offering more (we know that can be debated). And for that sum they got a business worth – on paper – a lot more. £20.465 million more. So the dull rather technical description 'Negative Goodwill' masks the simpler reality of a nice little earner.
It is unusual practice I am told by accountants to release negative goodwill to the profit and loss account in this way. After all that number represents more of an asset value that might normally belong in the balance sheet not the statement of annual flows of income and expense. Unusual but I emphasis still legitimate practice.
But why do it in the Annual Accounts and before that the Interim Accounts (back in February this year) and even before that flag it in the Prospectus?
My answer to that is look at the earnings per share. In the annual accounts these are reported as 2.09 pence per share. This is that profit of £948,000 divided by the number of shares issued across the period (given the IPO was part way through the relevant number of shares issued is about 45 million not the 65 million we now have).
Earnings per share. That in simple terms is the basis for putting a value on Rangers. While finance professionals invent and re-invent how to put a value on a business, the bottom line is that the surplus a business generates should be the basis for putting a value on that business. And the Rangers account report that surplus or profit per share as 2.09 pence per share.
So what value does that 2.09 per pence per share put on Rangers. Using something called the discounted cash flow method and assuming a discount rate of 4.5% I estimate a value of 46.4 pence per share. The discount rate represents what return I am looking for as an investor. If that is higher (say 10%), then I value Rangers lower (21 pence per share). Based on the annual accounts and if I want or need returns of 4.5% I would hence pay around 46 pence per share. All you market watchers will know that latterly the Rangers share price has ducked and dived in the 40 to 55 pence per share range. Today it is sitting at 48 pence.
So maybe this says the markets are right after all on the value of Rangers. Our institutional investors like steady predictable returns and so a discount rate of 4.5% is probably not too far off.
But that valuation depends hugely on that release of negative goodwill. It supports the current market price, it is why Green and Imran cashed in their 1 pence shares at market prices in the 40 to 55 pence range. While all the time the business is fundamentally loss making.
The Accounts lay reasonably bare the financial strategy. Money has been made from the Rangers brand value – a brand value that derives from us the fans as paying customers. Not value that has been generated from prudent business planning and creative new ways of enhancing and exploiting the Rangers brand.
The accounts painted a worrying picture. Not as worrying as some have claimed in that with some income growth and a tight tight lid on costs, Rangers should get through this season and next without the need for new capital injections. By that time we will hopefully be preparing for the return to the top tier. That wouldn't be a bad time to raise new money in my view.
But one consequence of this year's spending excesses and bad decisions has been a steady erosion of that negative goodwill at least in financial terms. In emotional terms it has resulted in an explosion of negative goodwill from the long suffering Rangers support. At the Interim Results the same accounting trickery was supporting a "profit" of £9.3million and earnings per share of 31 pence. By year end this has evaporated down to less than a £1 million and 2.09 pence per share.
This is serious value extraction in little more than 13 months. Charles Green and friends took risks and were part of saving Rangers in my view. With the hindsight of the accounts it is now evident that the early IPO and the money raised allowed Green's Rangers venture to survive year 1 and move onto year 2 (even if he didn't). But they have been extremely well – overly perhaps - rewarded for doing so and through what appears to me to be no more than accounting trickery have extracted for themselves a big chunk of the Rangers brand value. The current or any regime will have to work a lot harder – smarter, better, faster - than Green did to reap the same benefits from the value of Rangers.
Disclaimer. Nothing in this article is to be construed in any way as professional investment advice. Make your own bad financial decisions.