The BackPage Weekly | The Manchester United Takeover & Structuring M&A Transactions
By Chris Paget & Dewi Hall Evans
In our BackPage Weekly #12 we looked at the continued prominence of Multi-Club Ownership structures. This last week reputedly saw the closing of the third round of the bidding process led by US bank Raine Group for Manchester United and so we thought it would be interesting to quickly look at some alternative Mergers & Acquisitions (M&A) structures that can be deployed in high value transactions, such as football club takeovers.
It's perhaps an obvious point, but the economic climate often has a significant bearing on how large M&A transactions are structured (as seen with the popularity of SPAC transactions during the flood of capital market liquidity during the pandemic). In this context, economic volatility and high interest rates tend to result in would be buyers either being unable to fully finance acquisitions or, alternatively, being unwilling to meet a seller’s valuation expectations.
In truth there are number of alternative M&A transaction structures that can be adopted to bridge such a valuation divide between buyers and sellers and, interestingly, the sale of Manchester United, with the Glazer family reportedly holding out for a £6bn valuation, provides a live – and very public - example of some these more favoured structures.
📈 Partial acquisitions
It is well documented that a number of the bids submitted for Manchester United will allow the Glazers to retain a minority stake in the club. INEOS are rumoured to have made a bid for a controlling stake (with the Glazers retaining 20%) while other bidders such as Elliot submitted bids for a minority interest.
A partial acquisition is one of the most common tools used to bridge a divide in valuation expectations as it allows a buyer to increase its notional valuation without having to utilise more capital or seek additional financing.
From a seller’s perspective, retaining equity allows it to benefit from any valuation upside owing to future growth in the business. It would be typical for a seller’s retained equity to be subject to so-called put/call options (being a right for the option holder to either buy a stock (a call) or the right to sell a stock (a put) in certain defined circumstances). This for example, has been rumoured as part of the INEOS bid as it would give the Glazers a path to a full sale and liquidity on its remaining shares.
A partial acquisition is a simple structural solution to differing seller and buyer perspectives as to valuation. However, a key negotiation point in such a structure is determining how much control the seller retains over the target company’s business. For example, it has been rumoured that one of the requirements of INEOS’s bid for Manchester United is for INEOS to have total control over all future transfer activity.
🧾 Vendor loan notes (VLNs)
A VLN involves the seller lending a portion of the purchase price to the buyer in order to partially fund the acquisition. By partially deferring payment of the purchase price (with that deferred portion being structured as an outstanding debt to be paid in future), VLNs bridge the gap between the amount of capital a buyer can access on completion of an acquisition and the valuation expectations of a seller. A VLN structure, in effect, results in a seller having sold an asset in exchange for a promise from the buyer to pay in future. As such, it will typically be protected by the seller taking security over the buyer’s assets.
As an example, the takeover of Newcastle United featured a VLN, with Companies House records showing that St James Holdings (the prior owner of Newcastle and a company controlled by Mike Ashley) lent funds as part of the acquisition to certain members of the buying consortium.
The VLN structure results in a seller retaining a financial interest in the target, albeit this time in the form of debt, rather than equity. As a result, similar or analogous issues will arise in both partial acquisitions and VLN structures with respect to the ongoing level of control that a seller should have in the target company.
✍️ Earnouts
An earnout has traditionally been the principal method of bridging a difference in the valuation expectations of a buyer and seller. An earnout is simply a contractual obligation to pay additional amounts in future based on the performance of the target company, resulting in the buyer and seller sharing the benefits of future performance. As a contractual arrangement, the terms of an earnout (including performance targets and payment amounts) can be flexible and will be heavily negotiated and bespoke to the specific transaction. Within a football club acquisition, commonly seen earnout targets are based on league placement, silverware and Europa or Champions Leagues qualification and/or success.
However, an earnout may not be appropriate in all cases; earnouts are typically used in transactions where the seller(s) is/are being retained by the target company in a management capacity following the acquisition. In this context, an earnout effectively acts as an incentive for management to continue driving the growth of the target company even after they have sold their shares.
⚽ Final Comments
Unsurprisingly, there are many structures that can be adopted in M&A transactions and many factors will determine which structure is the most appropriate (or preferable to the parties). From a macro perspective, it is interesting to observe the ebbing and flowing of these structural trends as the structures adopted are often good general indicators to the various economic head or tail winds being experienced in the M&A market.
As the Manchester United process moves towards the Glazers selecting their preferred bidder (and thus structure) it will be interesting to watch how any deal is finally structured. Likewise, with a number of sales of other high profile sports assets reportedly in the pipeline, the adoption of alternative M&A structures is likely to be more commonplace given the current climate and increasingly high valuations of major sporting properties.
