Red Knights to target Glazers' debt in bid for Manchester United
The Red Knights consortium plotting a takeover at Manchester United may attempt to use the £709m of debt loaded on to the club by the Glazer family as a means to oust them from Old Trafford
The Knights, a consortium of wealthy individuals led by Goldman Sachs chief economist Jim O'Neill, are understood to be considering buying portions of the debt to gain leverage over the Glazers.
It is one of several options being discussed as they attempt to marry their financial expertise and personal wealth to an apparently irresistible groundswell of supporter backing.
The Glazers' use of debt to buy the club is the principal objection of supporters opposed to the Floridians, and there will be a sweet irony for many fans if they manage to turn the leveraged purchase against them.
The debt is split into two portions. Around £202m of expensive payment-in-kind (PIK) loans reside with a group of New York hedge funds at interest rates of 14.25pc rising to more than 16pc, with the remaining £507m owed to investors who took up the recent bond issue.
One option being considered by the Red Knights is to buy up the PIK loans, making them among the Glazer's principal creditors. They could also target the bonds, giving them influence over the family.
Either route would signal a bid for the Glazers' ownership.
Hostilities were officially declared on Tuesday when O'Neill led his consortium and their legion of green-and-gold-clad supporters over the barricades. After news of a meeting between O'Neill and his associates emerged on Monday, Tuesday brought confirmation that the loose coalition of financiers was training its sights on United.
The official line from the Glazers' spokesman was sanguine. "Manchester United is not for sale, and it's business as usual," he said. It was a predictable response from owners who have demonstrated a rhino's-hide resistance to criticism in their five-year tenure at the world's richest club.
The family's position was bolstered by results that showed revenue up 19pc, from £121.7m to £144m, for the six months to Dec 2009, largely due to increased Champions League income.
The accounts also revealed the cost of the bond issue, with £24m taken from cash reserves to cover fees. The accounts also disclose that "further cash … is available for the company to use at its discretion".
It is thought this is a reference to a dividend of up to £95m the Glazers are permitted to take out of the club under the terms of the bond. The accounts also showed cash reserves of £98m.
It is this use of the club to fund acquisition debt that has outraged supporters, and the Knights intend to harness that disquiet.
While the project may look to some a classic case of millionaires high on the greasepaint-whiff of football, the Knights, for all their self-aggrandising title, have substance. O'Neill is among the most respected economists in the UK. He is a former non-executive director of United who opposed the Glazer takeover, and he remains close to United chief executive David Gill.
His involvement is not without personal jeopardy. A spokesman for the Knights stressed that he was acting in a personal capacity, but his position has already brought a personal intervention from the Glazers, who are understood to have contacted Goldman's New York head office to complain after he went on the record to say there was "too much leverage" at United.
O'Neill is joined by equally credible figures. Mike Rawlinson, a partner at City law firm Freshfields, was an adviser to United when the Glazers targeted the club in 2005 and also knows Gill.
Paul Marshall, a partner at hedge fund Marshall Wace, and Richard Hytner, deputy chairman of Saatchi and Saatchi, are also involved, as is investment banker Keith Harris.
They are a formidable grouping but to overcome scepticism in the City and hostility in Florida they will need to produce a credible proposal in the face of the fierce complexities their ambition poses.
As well as the debt options they are considering a straightforward bid. This would require upwards of £700m to offer the Glazers at least twice the £272m they personally put into the original takeover and to satisfy the PIK loans.
Any deal is further complicated by the terms of the bond issue, which require any new owner to redeem them all at 101pc, an additional cost of £512m. The Knights believe they may be able to reach agreement with the bond investors, but they still require a huge fund-raising effort. They will seek to create a 'top tier' of as many as 40 investors putting in £10m each, with a pyramid of smaller investors underneath.
If they succeed they will also need to create a means of catering for the different requirements of investors, some of whom will want a return while others are happy to hand over their money in exchange for seeing their name carved on a Knights honours board at Old Trafford.
None of this is insurmountable, but in the face of apparently implacable opposition from Florida, the Knights have a long way to go before they reach Jerusalem.