Glazer debt could gift hedge funds huge share of Man Utd

Malcolm Glazer's offer document reveals that there is an enormous incentive for the Floridian businessman to refinance the controversial payment in kind notes (Piks) he used to finance his bid for Manchester United FC long before their maturity date.

As exclusively revealed by The Lawyer last Monday (23 May), the £275m worth of Piks, or preferred securities, issued by Glazer to three US hedge funds have a 15-year term.

However, the offer document posted to Manchester United shareholders last Monday states that they can be redeemed at any time after the offer closes. If, however, they are redeemed on or before 12 May 2007, the US sports tycoon would be forced to pay a premium, estimated to be approximately £50m.

But there is one clause which has so far attracted little attention, Clause 7A in Appendix 4: if the Piks remain outstanding after 63 months from 12 May 2005, Glazer will be forced to transfer 30 per cent of his stake in Red Joint Venture to the hedge funds. Red Joint Venture is the holding company of Red Football Limited, which in turn is the bid vehicle Glazer used to buy the football club.

Nick Towle, chairman of the club's fans' lobby group Shareholders United, said that although the early redemption premium of £50m will be a "sting", he nevertheless expects Glazer to redeem the Piks within six months of the takeover.

According to Shareholders United, the Piks will accumulate £48m of interest every year, which will be payable when the notes are redeemed.

"Nobody can sustain that [level of interest] for that long [15 years]. Glazer is therefore going to refinance the Piks and will have to secure the new debt against Man U assets, as he doesn't have any personal assets," argues Towle.

As they are structured currently, the hedge funds Citadel Horizon, Perry Capital and Oz Management have no recourse to ManchesterNick Towle,

Shareholders UnitedUnited. Consequently, it will be in their interest to realise their investments sooner rather than later. "For hedge funds, 15 years is beyond the ends of the earth," explains Towle.

One source close to the Glazer camp described the 15-year term of the Piks as a "lifetime" (The Lawyer, 23 May). However, a source close to the club argues: "It's almost disingenuous of [the Glazer camp] to be pumping out that lie. There's no way Glazer is going to let these securities last for 15 years. It's not something the hedge funds will want either - a five-year position is long enough for such funds.

"When Glazer refinances the preferred securities, there would be nothing to stop him securing the new debt against Man U's assets."

The source also argues that, with the risk of losing 30 per cent of his stake in Red Joint Venture, Glazer has an enormous incentive to refinance the Piks. Although 30 per cent is still a minority stake under the old Takeover Code, a shareholder with a stake in a company of that size was defined as having "control" of the company.

One way of refinancing the Piks would be to issue a bond to be financed by match day revenues. This method of financing is possibly going to be used by Arsenal FC to pay for its new stadium. However, Towle has asked Manchester United fans to undermine Glazer's business model and is understood to have urged them to follow his lead and not renew their season tickets.

In addition to the £275m worth of Piks, Glazer has borrowed £265m secured against the assets of Manchester United and £272m in equity contributions. This high level of debt has been the principal reason for the club's board to consistently refuse to recommend Glazer's bid (see Analysis, page 18).

Despite Glazer securing more than 75 per cent of the shares, the club's fans are determined not to surrender to the owner of the Tampa Bay Buccaneers. They are now exploring the possibility of launching legal challenges against Glazer's bid under Sections 157 and 54 of the Companies Act 1985.

Under Section 157, 10 per cent of Manchester United's shareholders can apply to the court to cancel the whitewash procedure needed by Glazer to secure the JPMorgan debt against the club. Meanwhile, under Section 54, 5 per cent of 50 shareholders can cancel the resolution needed to take the club private.