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Since news broke of Birmingham International Holdings receiving an “indicative, non-binding offer” for 24% of Birmingham City PLC there has been a lot of talk about how long the whole sale process will take. We’ve seen Jeremy Wray of Soccer Management Worldwide talk about how is group have a three week exclusivity period and the hot question is “what’s next?”
Like most football fans, I don’t have qualifications in running a multi-million pound firm and as such I’m working on a layman understanding. That being said, with there being information in the public domain it’s possible to find out what they mean by using specific words and from there to try and build a picture of the ongoing situation.
To answer the question of “how long is this going to take” we need to understand what “this” is. As we’ve known for some time the sale of BCFC has been complicated due to BIH wanting to retain its listing on the stock exchange and the issues that surround that; ie the need for BIH to diversify it’s interests into another business to prevent it becoming a pure shell and the lack of available cashflow BIH has to do that deal.
The question has been asked as to why BIH doesn’t drop this deal to sell in tranches and instead do some sort of “back to back” deal whereby they use the money from selling the club and put it immediately into buying something else which it is negotiating at the same time. As I understand it, that is not possible for a number of reasons. Firstly – BIH are bound by the rules of the HKSE and I am sure that if it was possible they would have brought it up with the HKSE to see if they could do it – the fact that they are not trying to suggests it’s not possible or the HKSE have disallowed it if they wish to retain their listing.
I see a “back-to-back” deal as like being involved in a house-buying chain; whereby to buy a new house someone is trying to sell theirs too; and the person they are buying the house from is also trying to buy something new and so on and so forth. A chain can make it difficult to buy/sell a house because one transaction is dependent on other transactions going through – if one falls apart all the rest do in a chain reaction. If this can happen in a chain of house-buying, it becomes exponentially more complex in a business scenario as there are many, many more variables and thus the time to complete one transaction could be vastly different to the time to complete another – thus there is no way a chain could form unless one was extraordinarily fortuitous. With this in mind it seems obvious to me that the only way that BIH can sell is to do it piecemeal, using the money as it comes in to buy something else. With a stock market listing worth £30mil or more it also seems obvious to me that it is far too valuable to lose – and would explain why BIH are hanging on to it with all their might.
The exclusivity deal
I have posted before my doubts that SMW has a period of exclusivity based on what I have heard from HK. I wanted to expand on this further, and to do this I think it’s important to understand various legal terms.
An indicative offer, also known as a letter of intent (LOI) or non-binding offer, is the term sheet used in a sales process which establishes a contractual negotiating framework between the potential buyer and the seller as they work towards a definitive purchase and sales agreement. Through this non-binding document, the potential buyer expresses an interest in acquiring the target and commits to good faith negotiations while ensuring the confidentiality of the process.
The essential components of an indicative offer include:
- The purpose and structure of the transaction;
- The determination of a price range (or at least the method for determining the purchase price);
- An explanation of the payment terms and any non-cash consideration that is being proposed;
- The anticipated sources of financing and the timing and steps required to secure such funds;
- A timetable of negotiations stating the length of this process, the period of due diligence, and the expected closing date; and
- Additional clauses that may need to be included such as a non-compete agreement, an exclusivity period, or the expectation of further involvement by the owner after selling
In essence – it’s an offer which says “we’re prepared to pay roughly this much, in roughly this time period, using roughly these finances”.
BIH confirmed in their announcement that
no formal agreement in relation to the Indicative Non-binding offer has been entered into…
in other words they had received the offer but had gone no further with it.
Jeremy Wray told the Birmingham Mail on May 29 that
On Friday 23rd May we were informed by Birmingham International Holdings that Soccer Management Worldwide Limited had been selected as the preferred bidder for Birmingham City FC, he said.
We have been granted a three week exclusivity period to complete final due diligence in order to more fully assess the opportunity. [My emphasis]
Let’s look into that in more detail. A “preferred bidder” is defined as:
…the bidder who is selected by the vendor, usually to some predetermined criteria, as being the party to whom it intends to sell the business, or award a contract, subject to the completion of negotiations and legal arrangements.
“Exclusivity period” is defined as
…a length of time (usually 30 to 60 days) during which a seller is prohibited from carrying out or furthering activities that relate to the sale of a firm with parties other than the prospective buyer with whom they have signed a letter of intent. The scope and duration of the exclusivity period varies (as per the decisions of the parties involved), but the specifications and regulations are written in each specific letter of intent.
In other words, Jeremy Wray told the Birmingham Mail that BIH had agreed broadly to sell the club to SMW, and had given them time to conduct final examinations and iron out the fine print before sealing the deal – which contradicts the statement given by BIH above.
I asked the HKSE if BIH would need to announce an exclusivity period and/or preferred bidder to the stock exchange and they referred me to Chapters 13 and 14 of the Listing Rules, particularly: 13.05-13.10B, 13.23, 14.08 and 14.33 and also The Guidelines on Disclosure of Inside Information mentioned in Chapter 13. From these, we can see rule 13.05 says
2. The Inside Information Provisions impose statutory obligations on listed issuers and their directors to disclose inside information as soon as reasonably practicable after the information has come to the listed issuers’ knowledge, and gives the Commission the responsibility for enforcing those obligations. The Commission has issued Guidelines on Disclosure of Inside Information. The Exchange will not give guidance on the interpretation or operation of the SFO or the Guidelines.
We can also see that inside information is defined as
17. Inside information must be specific information. Specific information is information which has the following characteristics
(a) The information is capable of being identified, defined and unequivocally expressed.
Information concerning a company‟s affairs is sufficiently specific if it carries with it such particulars as to a transaction, event or matter, or proposed transaction,event or matter, so as to allow that transaction, event or matter to be identified and its nature to be coherently described and understood.
My interpretation of those rules is that if there is a period of exclusivity with a preferred bidder, then BIH have to announce that fact to the stock exchange – and the fact that they haven’t indicates that there isn’t a period of exclusivity and that SMW are not preferred bidders.
The fact SMW are looking at the books shows that BIH are taking the bid seriously – which is confirmed by the fact that it was announced to the stock market complete with trading halt – but it doesn’t necessarily make them “preferred bidders” – at least two previous groups have undertaken that kind of due diligence prior to SMW without receiving that status.
In short, what we have is conflicting information and I think we have to err on the side of caution and believe only what is officially announced. As such, I don’t think the sale is as close as some believe and I think that we will be waiting longer than June 13 (which would be the end of Jeremy Wray’s 3 weeks) before we necessarily hear anything further. Of course – this could all change in that BIH could well be negotiating a firm deal and could accept that but until something is announced we just don’t know. So in answer to the question of how long will it take – I think we’re back to crystal balls, divining rods and guesswork for now.