The Devil is in the Detail.....

More than a month has passed since the Malaysian-led regime took control of Cardiff City, but few details have emerged in the press with regard to the nature of the deal which saw Dato’ Chan Tien Ghee (TG) installed as the club’s new Chairman.

That’s a pity, as the contents of former Chairman Peter Ridsdale’s notice to shareholders, which was issued prior to the recent General Meeting, were interesting to say the least. They gave a clear indication of the complexity of the investment agreement and went a long way towards explaining why the negotiations were so protracted. Make no mistake about it, the Malaysians drove a hard bargain and the club’s financial position has improved considerably as a result.

The following is my interpretation of the deal based on the details contained in the General Meeting notice and a variety of other documents which have been published by the club in recent years:

The New Ordinary Shares Issue

When the Malaysians’ interest was confirmed late last year, many observers believed TG and his business partner Tan Sri Dato’ Seri Vincent Tan Chee Yioun would secure a stake in Cardiff City simply by purchasing blocks of shares from existing shareholders, and probably at knockdown prices given the club’s serious financial problems. However, that’s not the way things worked out. Instead, a complicated agreement was reached which should prove far more beneficial for the football club in both the short and long terms.

The deal, which was rubber-stamped by the shareholders during the General Meeting, saw the creation of 118,665,241 new ordinary shares in Cardiff City Football Club (Holdings) Limited. There were already 41,334,759 ordinary shares in circulation, so the total now stands at exactly 160,000,000.

The latest share issue has four separate elements – the issue of 38,240,918 new ordinary shares to the Malaysian investors; the issue of up to 33,208,782 new ordinary shares to three of the company’s largest creditors; the issue of up to 12,746,973 new ordinary shares to the company’s existing shareholders; and the issue of up to 34,468,568 new ordinary shares which the Directors have the authority to allot in response to future investment opportunities.

Each new share has been given a subscription price of 15.69p, so in effect the issue has the potential to be worth around £18.6 million to the football club if it is fully subscribed. As a result of the deal, existing shareholders could see their stakes in the club shrink to roughly one quarter of their former value in percentage terms, although the 2010 subscription price is exactly the same as that which was paid by the majority of investors who bought shares following the January 2007 issue.

The Malaysian Investment

Under the terms of the new agreement, TG and Vincent Tan acquired 38,240,918 ordinary shares for a sum of £6 million. However, the club had already borrowed £1 million from the Malaysian businessmen prior to the deal being struck and that loan was converted into shares, so in reality their investment brought £5 million of new money into the company.

As a condition of the Malaysians’ share subscription, they were entitled to appoint two directors to the club’s board and elect one of those directors as Chairman. This part of the agreement will remain valid for as long as they hold 30% or more of the company’s issued share capital. TG therefore took over from Peter Ridsdale as Chairman, while Vincent Tan’s son, U-Jiun Tan, joined the board as a Non-executive Director.

Messrs Chan and Tan currently hold approximately 40% of the ordinary shares that have so far been allotted. If the remainder of the new ordinary shares which are set aside for creditors and existing shareholders are eventually taken up, the Malaysians would hold a fraction over 30% of the enlarged share capital. However, that figure could alter significantly if any of the shares which are designated for future investment are issued.

PMG Estates Limited and Paul Guy

PMG Estates Limited is the successful Cardiff-based commercial property development firm owned and controlled by Paul Guy and Mike Hall. The company is the football club’s largest secured creditor.

In 2008, PMG loaned the club a sum of £9 million in order to cover a shortfall in the funding required to build the Cardiff City Stadium. The interest-bearing loan was secured against future income from the stadium’s Premier Club seating area. As at 1 April 2010, more than £9.2 million of the debt remained outstanding.

Prior to the new agreement, PMG held 6,294,836 ordinary shares in Cardiff City Football Club (Holdings) Limited, while Paul Guy held an additional 2,069,345 shares. Under the terms of the new deal, £300,000 of the cash owed to PMG was converted into 1,912,046 new ordinary shares, while the balance of the loan was restructured so it is repayable in full by 30 September 2013 as opposed to being repayable immediately.

Interestingly, the agreement states that a further amount of up to £2.7 million of the outstanding debt can be converted into shares at the club’s discretion at any time before 31 December 2011 provided sufficient written notice is given to PMG. This could result in the issue of another 17,208,413 new ordinary shares to the property developers.

PMG and Paul Guy currently hold a combined total of around 11% of the allotted ordinary shares, but that percentage will rise significantly if the clause outlined above is exercised in full.

In a surprise move, Paul Guy has returned to the club’s board of directors as a result of the new agreement. Guy had previously served as a director between 1997 and 2004 but he declined to take a seat on the board following the January 2007 takeover. On that occasion Mike Hall became a director, although he resigned nine months later during the club’s legal battle with major creditors Langston.

Michael Isaac

Another character who has made an unexpected return to the Cardiff City boardroom is local businessman Michael Isaac. He initially became a director of the club in November 1999 and served on the board until June 2005, when he was relieved of his duties as Vice-Chairman following a public spat with former Bluebirds owner Sam Hammam.

In 2004, Isaac gave the club a loan of £1.5 million with interest fixed at a staggering rate of 20% per annum. The terms of the loan were restructured in 2009 when interest was reduced to 3% above base rate and monthly repayments were set at £50,000, but as at 1 April 2010 the club still owed the Cowbridge-based property developer a sum in excess of £1.75 million.

Under the terms of the new agreement, £1.25 million of the outstanding debt was converted into 7,966,858 new ordinary shares, while the balance is scheduled to be repaid in interest-free monthly instalments commencing in August 2010. In addition, a further amount of up to £500,000 can be converted into shares at the club’s discretion at any time up until 31 August 2010 provided sufficient written notice is given to Isaac. If exercised in full, this clause would give him another 3,186,743 new ordinary shares.

Having played no part in the January 2007 takeover, Michael Isaac’s shareholding prior to the new agreement was relatively small. He held just 49,600 ordinary shares, but that figure has now risen to 8,016,458. Isaac currently holds roughly 9% of the shares which have already been allotted.

Steve Borley and CMB Engineering

Long-serving director Steve Borley initially joined the Cardiff City board in 1997. In May 1999, he succeeded Samesh Kumar as Chairman and served in that capacity until August 2000, when the club was purchased by Sam Hammam. He has remained as a director ever since.

Before the latest issue, Borley held a total of 3,226,574 ordinary shares. Under the terms of the new agreement, he subscribed to a further 637,348 shares with a value of £100,000. In 2009, he was awarded a £50,000 bonus by his fellow directors in recognition of work he had undertaken on the club’s new stadium project. However, it was revealed during the February 2010 General Meeting that the bonus remained unpaid at that point in time. Therefore, it seems certain it has subsequently been converted into shares.

Steve Borley is the Managing Director of CMB Engineering, South Wales’ largest independent building services contractor. It is common knowledge that CMB is owed a substantial sum of money in relation to work the company carried out on the new stadium, although the exact figure has never been made public. As a part of the investment deal, Borley agreed to convert £460,458 of the outstanding debt into 2,934,722 new ordinary shares, while the balance is scheduled to be repaid in twelve interest-free monthly instalments commencing in August 2010.

Lifelong Bluebirds fan Borley and his firm currently hold a combined total of 6,798,644 shares, which equates to a little over 7% of the club’s issued share capital.

Peter Ridsdale

According to the football club’s accounts for the year ending 31 May 2007, much-maligned former Chairman Peter Ridsdale was paid a £500,000 bonus in January 2007 for successfully renegotiating the size and terms of the loan notes agreement with the Langston Corporation and achieving unconditional status on the new stadium project. The notes to the relevant financial statements claim the entire bonus was immediately reinvested in the club when he acquired 4,545,455 shares at a discounted subscription rate of 11.11p per share.

Ridsdale later disposed of 400,000 shares, which left him with a total of 4,145,455. Prior to the new investment agreement, he held approximately 10% of the company’s issued share capital, but that figure has now dropped to a fraction under 4.5%.

Alan Whiteley and M&A Solicitors

A long-time associate of major shareholder Paul Guy, corporate lawyer Alan Whiteley joined the Cardiff City board following the January 2007 takeover, having previously filled the role of Company Secretary. Around that time, he acquired 1,274,697 shares in the club in his own name and a further 796,686 shares he holds jointly with Stephen Berry, his senior partner at M&A Solicitors. Under the terms of the new agreement, he subscribed to another 637,348 shares with a value of £100,000.

Like fellow director Steve Borley, Whiteley was awarded a £50,000 bonus by the board in 2009 in recognition of his work on the new stadium project, although he told shareholders during the February 2010 General Meeting that he hadn’t collected the money. Therefore, as is the case with Borley, it seems certain that Whiteley’s bonus has been converted into shares. He currently holds almost 3% of the club’s issued share capital.

Sam Hammam and Rudgwick Limited

In August 2000, former Wimbledon owner Sam Hammam bought Cardiff City Football Club for a sum of £3,139,558. The purchase agreement involved the issue of 18,562,500 ordinary shares to his company, Rudgwick Limited. At that stage, the controversial Lebanese businessman controlled no less than 82.5% of the club’s share capital.

Following his resignation as Chairman in November 2006, the agreement which formed the basis of the January 2007 takeover resulted in Hammam’s stake being slashed to 1,856,250 new ordinary shares. That left him holding 4.5% of the issued share capital, while the latest deal further reduces the figure to just 2%.

Reports appeared in the South Wales Echo last week claiming that Hammam will meet TG within the next fortnight to discuss the possibility of him returning to the Bluebirds board. However, the club quickly poured cold water on the idea with a statement on its official website which read:

"Cardiff City Football Club can confirm that there are no plans to have Sam Hammam return to the club in any capacity. The only scheduled meetings due to take place are those being brokered through the club’s solicitors and relate to the Langston debts."

The current Chairman further clarified the situation on Friday morning in an open letter to City supporters. He said:

"With regards to the media speculation concerning Sam Hammam, as stated yesterday the only contact we have had is through the club’s solicitors and is in regards to addressing the Langston agreement. I would stress that the comments (in the press) are unhelpful, unfounded, inaccurate and self-serving.

"As of yet, no meeting has been set up and I have had no direct dialogue with Mr Hammam. If there is to be a meeting, I will be accompanied by the club's solicitor and it will be to discuss a final settlement and timing of the whole Langston issue."

The Issue to Shareholders

Under the terms of the new agreement, existing shareholders were offered an opportunity to buy further shares at a subscription price of 15.69p. The club set aside 12,746,973 new ordinary shares with a value of £2 million for this purpose. A minimum investment of £1,000 was required from each qualifying shareholder and a deadline of 25 May 2010 was set for applications.

As previously mentioned, directors Steve Borley and Alan Whiteley each subscribed to 637,348 new ordinary shares, but only an additional 828,550 shares with a value of £130,000 were taken up by the company’s minor shareholders before the deadline passed. Therefore, roughly 10,643,700 shares (worth £1.67 million) remain unissued.

The club’s smaller shareholders currently own a combined total of approximately 22,450,000 shares, which works out at around 23.5% of the issued share capital.

Additional Shares to be allotted by the Directors

The final element of the agreement involved the issue of an additional 34,468,568 ordinary shares which the Directors have the authority to allot in response to future investment opportunities. The notice to shareholders circulated prior to the General Meeting stated the Directors do not intend to release these shares, which have an approximate value £5.4 million, to any person who is not already a shareholder. However, the board have reserved the right to do so should the circumstances dictate.

Appointments and Resignations

Following the General Meeting, the club confirmed that Dato’ Chan Tien Ghee had been appointed as Chairman, while Paul Guy, Michael Isaac and U-Jiun Tan had joined the board as Non-executive Directors alongside Steve Borley and Alan Whiteley.

Also confirmed were the appointments of Gethin Jenkins as the club’s new Chief Executive Officer and Doug Lee as Finance Director. Jenkins spent the previous six years occupying a similar role with the Newport Gwent Dragons rugby club, but little is known about Lee’s background.

Meanwhile, it was announced that former Chairman and Chief Executive Peter Ridsdale, Group Finance Director Alan Flitcroft and Non-executive Director Keith Harris had resigned from the board with immediate effect. Ridsdale, however, is apparently continuing to work for the club on a short-term consultancy basis.

Conclusions

The new investment agreement was essential in order for Cardiff City Football Club (Holdings) Limited to continue to trade. Without the Malaysians’ timely intervention, the company stood very little chance of avoiding either administration or liquidation. The situation had become desperate but the agreement seems to have provided the club with a degree of stability. Although the financial position hasn’t altered dramatically and serious cash-flow problems still exist, things appear to be moving in the right direction.

The latest share issue raised approximately £5.2 million of new money, and that was vital as it allowed the club to clear its outstanding tax bill. The investment agreement also resulted in more than £3.1 million of debts being converted into equities and has the potential for a similar amount to be wiped off the balance sheet in the near future if the club exercises the clauses relating to the loans provided by PMG and Michael Isaac.

Almost all of the recent developments have been positive, but I believe the composition of the new board of directors has emerged as a definite negative. Those who are currently making the major decisions at the Cardiff City Stadium appear to lack any genuine football credentials, and for me that is a legitimate concern.

In effect, the new regime consists of two wealthy Malaysians who have no previous experience of British football, three local businessmen who were in control of the club ten years ago when it was relegated to the league’s bottom division, a chief executive whose background is in rugby, a finance director and a corporate lawyer. From my point of view, that is hardly what could be described as a boardroom dream team.

With all due respect to Gethin Jenkins, I have to say I was bitterly disappointed by the news of his appointment as City’s Chief Executive Officer. Beforehand, I had fully expected the Malaysians to employ an experienced administrator who would look after the football side of the club’s activities on their behalf. I envisaged the new man would have a proven track record in the upper levels of the British game and a wide range of contacts to match. Instead, the board has opted for someone who has spent the last six years in charge of a local Rugby Union club where the average attendance is a shade over 6,000.

It goes without saying that Championship football and regional rugby are very different ball games in every respect, but that doesn’t mean Jenkins is incapable of doing a decent job for Cardiff City. For all we know, he is a talented administrator who will prove his worth to the club in the long term. Nevertheless, having made the decision to install him as CEO, I feel the board have missed a trick by failing to bring in an experienced football executive on a temporary basis to work with manager Dave Jones on important issues such as contract negotiations and player recruitment.

The 2010 close-season is a critical one as far as the squad’s development is concerned. After the disappointment of the play-off final defeat to Blackpool, the team appears to be at a crossroads. Three senior players have already been released and another has returned to his parent club following a season-long loan spell. One of the side’s star performers is certain to leave, while several more are being strongly linked with moves to other clubs. In addition, a number of key players have just a year left to run on their contracts, so talks over new deals will soon be essential.

Clearly there is plenty of work for Dave Jones to do in the coming months, while the budget he will have to operate within is almost certain to be tighter than it has been during any of his previous five seasons in South Wales. It appears the manager is under a great deal of pressure this year, especially as he’s likely to get little assistance from the club’s hierarchy.

There is no doubt that the summer of 2010 is a transitional period for Cardiff City Football Club in every sense. The new Chairman and his board are trying to work their way through the mess that has been left behind by previous regimes, while the manager is attempting to strengthen his squad despite the obvious financial restrictions. Those tasks are not going to be straightforward, but then very little is where the Bluebirds are concerned.