Freshfields, Cazenove run the gauntlet on Man Utd bid

Love Manchester United FC or hate it, City advisers agree that Malcolm Glazer’s latest bid for the richest football club in the world is a fascinating rematch.

The Floridian spent last week poring over Manchester United’s books – or at least those chapters he was allowed access to by the board as part of a limited due diligence exercise.

But there is still plenty to talk about. First off, despite press speculation that one would drop off, you’ve got JPMorgan and Cazenove on opposite sides of a de facto hostile bid with the ink still not dry on their UK corporate broking joint venture JPMorgan Cazenove.

On the face of it, this looks like a pretty serious conflict, but its highly unlikely that Manchester United would wish to be without Cazenove’s David Mayhew, who also helped save Marks & Spencer from Philip Green in its hour of need.

Manchester United spokesman Phil Townsend said the club was happy that “there were sufficient Chinese walls in place and sufficient separation between the two organisations”.

Mayhew is heading the joint venture, but JPMorgan’s debt team is not part of JPMorgan Cazenove. Some lawyers also argue that, because JPMorgan is now providing debt rather than financial advice, the potential conflict is less serious. However, given that the £300m the bank is bringing to the party is so crucial to Glazer’s bid, it is difficult to see how that argument stands up.

What is clear is that the Takeover Panel needed to be happy with the arrangement, because financial advisers must be independent under the Takeover Code.

Manchester United will need a financial adviser to provide commercial reasoning to back up the club’s decision to turn down a bid if Glazer makes a formal offer. This would become a matter of public record under Rule 3 of the code. Glazer has yet to do this, but if the board turns down his latest informal offer he may be forced to make a formal bid.

Townsend said the club and Cazenove had sought and obtained the advice of the panel, but said the advice was confidential. However, sources close to the panel say that Cazenove will not be allowed to give formal Rule 3 advice should Glazer make a bid.

Unusually for a takeover situation, it is actually not the bankers who have the key role here. Step forward the man of the moment: Freshfields Bruckhaus Deringer partner Mark Rawlinson.

In a break with precedent, the board, advised by Rawlinson, has stipulated that while Glazer’s offer price is fair, the bid is not in the best interests of the company because it will impose undue financial strain on it.

Freshfields flatly declined to comment, but sources close to the board said the company is acting on legal advice, which says that it owes a duty of care not to the shareholders seeking an exit, but to the company itself – hence the split announcement.

Theoretically, the board can say precisely what it likes to Glazer until he actually stumps up with a formal offer. However, it has been quite explicit in its reasoning for turning down the bid. Practically, it would be very difficult for the directors to go back on what they have said unless Glazer were to amend his offer significantly, particularly in terms of leverage and preference shares.

So although Freshfields’ advice will include strongly worded caveats, the board is running this split responsibility argument for real.

The Manchester United bid is highly unusual in the level of passion it arouses and football clubs are an idiosyncratic type of business in that revenues are governed so much by on-pitch performance. You need only look at Leeds United’s demise to realise that football clubs should not carry too much debt. However, rejecting a bid as too highly leveraged is a dangerous precedent for a board to set. What if, say, Woolworths was able to turn down Apax’s recent bid on the basis of leverage rather than merely price.

Private equity houses, which use increasingly high leverage, will be watching the shareholders’ response with bated breath.

Should a disgruntled minority shareholder not get the chance to take up Glazer’s offer, they could sue the board for breach of fiduciary duty. This would be far from easy to prove, but Manchester United’s financial advisers and Freshfields could be on the hook.

Football is a dangerous game.