I started following Sunderland after watching the Netflix series (live abroad). Have been lurking on this and RTG for a while but finally got annoyed enough to create an account and post something from reading all the nonsense that is spouted.
When you buy a business, you buy the whole thing. All the assets, the debts, the cash in the bank accounts. The whole lot.
if the company you are buying has £50m of cash sitting in a bank account and no debt then obviously that is factored in to the price. If you buy that club for £100m, the actual VALUE of it is £50m, not £100m. Because you are getting £50m of cash with the purchase. If just before you buy that club, the entire £50m of cash was paid out as a dividend to the previous owner, would you still pay £100m? Of course not, you would pay £50m. The same as before as that is the real value of the enterprise. The other part is related to the cash balance and is a different thing. This is defined as ‘enterprise value’ in corporate finance and is completely standard.
The point being that if you had two identical business but one of them had £100m of debt and the other one had zero debt, you would obviously pay £100m less for the one with the debt than the other one. But both businesses would have the same enterprise value. All the debt does is reduce the value of the equity.
This is the whole point about the Sunderland purchase price. The club (the thing being bought) had a debt of £25m to Short. It also had various other assets worth something but also was making losses. The key point here is that there were two potential scenarios:
1. Ellis Short sells the club with the debt still attached for an enterprise value of £40m. Because the debt is £25m, that means equity value of £15m. But if you buy the equity for £15m AND agree to take on the debt of £25m, you have paid £40m.
2. Ellis Short cancels the debt. That means the enterprise value of £40m doesn’t have any debt to off-set and therefore he gets paid £40m cash. The new owners have paid £40m (now all cash) but have bought an asset with £25m less debt.
The point here is that it doesn’t matter whether Ellis Short gets paid £40m and cancels the £25m debt or gets paid £15m and also gets paid back the £25m debt. In both cases he gets £40m back.
It is the same from the buyers perspective. Handing over cash and taking over the debt are the same thing. If I buy a house from a bankrupt person for £1 by agreeing to take over their mortgage liability of £1m, have I bought the house for £1? No, I’ve bought it for a million and one.
Sunderland was sold on the basis of an enterprise value of £40m. A decent chunk of that value was due to the imminent parachute payments which was known to be coming. So essentially it was bought/sold for £40m when both sides knew it was later going to get a £25m chunk of cash. So the real valuation probably was about £15m as this would have been factored in.
So basically the enterprise value was made up of £15m (basically what was agreed the club was worth without parachute payments) and then the future £25m of cash from the parachute payments. That is the £40m.
But it wasn’t sold debt-free for £40m. It was sold along with £25m of debt. So that is basically £15m of equity value and then £25m of debt. Also £40m.
Short got £40m back, the owners paid £40m. £15m of equity and £25m of debt. That is why Sartori bought 20% of the club for £3m. Because that is what the equity was valued at.
Now how the owners financed the £40m is another matter. Most corporate transactions are financed through a mixture of debt and equity. It’s no different to buying a house. When you buy a house for £500k, you pay £500k. If you take out a mortgage for £450k to get the cash, it doesn’t mean you didn’t pay £500k.
That is what has happened with Sunderland. It’s nothing out of the ordinary at all. They have paid £40m and in order to do that have taken on a chunk of debt. They still paid £40m.
It looks like the £25m was paid through a loan by Sunderland to Madrox who then paid Short. Sunderland used to owe Short £25m but now owes nothing. So that means the value of the equity is now £25m higher. It used to have an asset of £25m cash from the parachute payments but now has an asset of the £25m loan to Maddrox so no change in terms of the balance sheet. But overall, Sunderland AFC is worth more as it has less debt.
From Maddrox perspective, they used to owe Short £25m but now they owe Sunderland £25m. They have moved the debt from the thing they owned to themselves. If I own something worth £40m that has a £25m debt, then t he value of my equity is £15m. If I move that debt to myself then the equity value of the thing I own is now £40m but I also have a debt of £25m. So it’s still a net £15m.
If Sunderland was sold for £40m, then the current owners would take that money, pay off the £25m of debt they have and be left with £15m, ie the same equity value they originally put in. They would make zero profit.
If you sell something for £40m and make no profit, that is because you bought it for £40m. All the movement of cash and debt between the club, Maddrox and Short means nothing overall.
in terms of the FPP transaction, I am not privy to the details but my best guess is that it is some form of convertible loan that allows conversion into equity under certain conditions. There was also a story in the Sun about SD demanding extra money if they got promoted to either the Champs or the PL. That was hotly denied but I suspect there was a grain of truth in it but just got the facts completely wrong. My guess would be that an agreement is in place for FPP to make further investments in the future on similar terms, e.g. £15m on promotion from League One, £25m on promotion to the PL. They are effectively buying an option to buy the club if it looks like making it back to the PL. The price for that option is probably a cheap loan so that Maddrox can get rid of some of that £25m of debt. But ultimately both Maddrox and FPP are going to be hoping that the club gets promoted which will effectively automatically sell the club to FPP at a price which will look cheap then but will still net Maddrox a good profit.
In the interim though, the challenge is stem the operating losses and get promoted. Not very easy to do both at the same time. But running at a loss doesn’t guarantee promotion either as SAFC should know all too well. The situation is what it is. Do the new owners have the capacity to sink £10m of fresh equity into the club every year? No. Not even £5m I would think. But it is hard to say without knowing the full accounts. Clearly they over-paid for the club - even at an equity value of £15m as they underestimated how fast it was leaking water. It was probably worth half that - at best. My guess would be that factor has removed the cushion Donald thought he might have to invest in the club. If you thought you had a £10m float and it turns out that you need to pour £9m into an Alvarez court case, your plans are scuppered. The thing you thought was worth £15m (plus the £25m) of debt actually should have been £6m and £34m of debt.
The club was basically worthless in terms of equity value. It’s worth more now but the new owners have borrowed £34m against it. So they would need to sell it for £45m just to break-even. These comments that they bought it for pennies and will walk away with a fortune if they sell it for £30m are stone-cold wrong. Any sale price under £40m and they have lost a packet.
When you buy a business, you buy the whole thing. All the assets, the debts, the cash in the bank accounts. The whole lot.
if the company you are buying has £50m of cash sitting in a bank account and no debt then obviously that is factored in to the price. If you buy that club for £100m, the actual VALUE of it is £50m, not £100m. Because you are getting £50m of cash with the purchase. If just before you buy that club, the entire £50m of cash was paid out as a dividend to the previous owner, would you still pay £100m? Of course not, you would pay £50m. The same as before as that is the real value of the enterprise. The other part is related to the cash balance and is a different thing. This is defined as ‘enterprise value’ in corporate finance and is completely standard.
The point being that if you had two identical business but one of them had £100m of debt and the other one had zero debt, you would obviously pay £100m less for the one with the debt than the other one. But both businesses would have the same enterprise value. All the debt does is reduce the value of the equity.
This is the whole point about the Sunderland purchase price. The club (the thing being bought) had a debt of £25m to Short. It also had various other assets worth something but also was making losses. The key point here is that there were two potential scenarios:
1. Ellis Short sells the club with the debt still attached for an enterprise value of £40m. Because the debt is £25m, that means equity value of £15m. But if you buy the equity for £15m AND agree to take on the debt of £25m, you have paid £40m.
2. Ellis Short cancels the debt. That means the enterprise value of £40m doesn’t have any debt to off-set and therefore he gets paid £40m cash. The new owners have paid £40m (now all cash) but have bought an asset with £25m less debt.
The point here is that it doesn’t matter whether Ellis Short gets paid £40m and cancels the £25m debt or gets paid £15m and also gets paid back the £25m debt. In both cases he gets £40m back.
It is the same from the buyers perspective. Handing over cash and taking over the debt are the same thing. If I buy a house from a bankrupt person for £1 by agreeing to take over their mortgage liability of £1m, have I bought the house for £1? No, I’ve bought it for a million and one.
Sunderland was sold on the basis of an enterprise value of £40m. A decent chunk of that value was due to the imminent parachute payments which was known to be coming. So essentially it was bought/sold for £40m when both sides knew it was later going to get a £25m chunk of cash. So the real valuation probably was about £15m as this would have been factored in.
So basically the enterprise value was made up of £15m (basically what was agreed the club was worth without parachute payments) and then the future £25m of cash from the parachute payments. That is the £40m.
But it wasn’t sold debt-free for £40m. It was sold along with £25m of debt. So that is basically £15m of equity value and then £25m of debt. Also £40m.
Short got £40m back, the owners paid £40m. £15m of equity and £25m of debt. That is why Sartori bought 20% of the club for £3m. Because that is what the equity was valued at.
Now how the owners financed the £40m is another matter. Most corporate transactions are financed through a mixture of debt and equity. It’s no different to buying a house. When you buy a house for £500k, you pay £500k. If you take out a mortgage for £450k to get the cash, it doesn’t mean you didn’t pay £500k.
That is what has happened with Sunderland. It’s nothing out of the ordinary at all. They have paid £40m and in order to do that have taken on a chunk of debt. They still paid £40m.
It looks like the £25m was paid through a loan by Sunderland to Madrox who then paid Short. Sunderland used to owe Short £25m but now owes nothing. So that means the value of the equity is now £25m higher. It used to have an asset of £25m cash from the parachute payments but now has an asset of the £25m loan to Maddrox so no change in terms of the balance sheet. But overall, Sunderland AFC is worth more as it has less debt.
From Maddrox perspective, they used to owe Short £25m but now they owe Sunderland £25m. They have moved the debt from the thing they owned to themselves. If I own something worth £40m that has a £25m debt, then t he value of my equity is £15m. If I move that debt to myself then the equity value of the thing I own is now £40m but I also have a debt of £25m. So it’s still a net £15m.
If Sunderland was sold for £40m, then the current owners would take that money, pay off the £25m of debt they have and be left with £15m, ie the same equity value they originally put in. They would make zero profit.
If you sell something for £40m and make no profit, that is because you bought it for £40m. All the movement of cash and debt between the club, Maddrox and Short means nothing overall.
in terms of the FPP transaction, I am not privy to the details but my best guess is that it is some form of convertible loan that allows conversion into equity under certain conditions. There was also a story in the Sun about SD demanding extra money if they got promoted to either the Champs or the PL. That was hotly denied but I suspect there was a grain of truth in it but just got the facts completely wrong. My guess would be that an agreement is in place for FPP to make further investments in the future on similar terms, e.g. £15m on promotion from League One, £25m on promotion to the PL. They are effectively buying an option to buy the club if it looks like making it back to the PL. The price for that option is probably a cheap loan so that Maddrox can get rid of some of that £25m of debt. But ultimately both Maddrox and FPP are going to be hoping that the club gets promoted which will effectively automatically sell the club to FPP at a price which will look cheap then but will still net Maddrox a good profit.
In the interim though, the challenge is stem the operating losses and get promoted. Not very easy to do both at the same time. But running at a loss doesn’t guarantee promotion either as SAFC should know all too well. The situation is what it is. Do the new owners have the capacity to sink £10m of fresh equity into the club every year? No. Not even £5m I would think. But it is hard to say without knowing the full accounts. Clearly they over-paid for the club - even at an equity value of £15m as they underestimated how fast it was leaking water. It was probably worth half that - at best. My guess would be that factor has removed the cushion Donald thought he might have to invest in the club. If you thought you had a £10m float and it turns out that you need to pour £9m into an Alvarez court case, your plans are scuppered. The thing you thought was worth £15m (plus the £25m) of debt actually should have been £6m and £34m of debt.
The club was basically worthless in terms of equity value. It’s worth more now but the new owners have borrowed £34m against it. So they would need to sell it for £45m just to break-even. These comments that they bought it for pennies and will walk away with a fortune if they sell it for £30m are stone-cold wrong. Any sale price under £40m and they have lost a packet.
