The key conclusion I reach is that the £15m revolving credit facility which is in place to stop Rangers exceeding borrowing limits should not be viewed as an example of the unselfish generosity of our Honorary Chairman. Instead, it is a loan, provided at market rates which prevents the demise of Rangers having a potentially serious impact on the entire Murray Group.
Murray International Holdings is a highly indebted company, and if Rangers were to go into administration, then so too could Murray Sports which would cause problems for MIH. But that's not all; if Murray Sports were to sell its 65% stake in Rangers at the current share price, then this might also be enough to seriously dent the MIH balance sheet. This probably means that a quick sale and early departure of David Murray is highly unlikely.
Rangers FC Supplies Less Than 1% of Murray Group Turnover
I had to smile when I heard David Murray answer criticisms about other Murray companies getting cash out of Rangers. His retort was that this represented less than 1% of Murray International Holdings (MIH) turnover. Actually it's closer to 2% than 1% - around £4m out of MIH turnover of £266m - but we won't argue about that. So why the smile? Well MIH makes almost 90% of its turnover from metals, property and mining which I don't believe Rangers FC is interested in. It looks to me that RFC provides around 15% of the turnover for the other Murray operations which come under the umbrella of "corporate finance and private investment". Now 15% is significant.
But when you look deeper at some of the individual companies the picture is even more extreme. Carnegie Information Systems, an IT company, took over 30% of its turnover in the year to January 2003 from RFC, Charlotte Ventures Holding Company which provides corporate finance services took over 25% of its turnover from RFC, and the daddy of them all is Azure Support Services, parent of Azure Catering which earned over 60% of its turnover from RFC in each of its last two reported years.
Who Owns Rangers?
Interestingly, Murray International Holdings no longer owns serious amounts of Rangers shares - it is not listed in the accounts as a subsidiary. RFC Investment Holdings which owns 65% of Rangers was demerged and transferred into Murray Sports in 1999. For this Murray Sports paid £60m to the Murray Group in the form of loan notes - ie it paid with debt not cash. A further £0.6m was paid in 2000, presumably as part of the rights issue. Today 65% of Rangers is worth around £30m. In addition, there is interest on the loan notes which at June 2002 had added up to £14.3m. All this meant that in theory Murray Sports owed MIH £75m 18 months ago. Because of the conditions on the loan, the interest is ignored.
To this outsider it looks like Murray Sports owns around £30m of Rangers shares and has a debt at least £60m to MIH. At the time of writing, Murray Sports had not published its accounts for the year to June 2003 (they are due by 30th April) but in its January 2003 accounts MIH wrote down the value of the loans from Murray Sports to just under £53m. We should see an explanation of why this happened when we see the next Murray Sports accounts, but for the MS stake in Rangers to be worth £53m would need a share price north of 140p - something not seen since the summer of 2002.
But what Murray Sports effectively comprises is 65% of Rangers plus a further £53m of debt. Hardly a healthy financial vehicle and if RFC went into administration, then it seems likely that Murray Sports would follow it pretty pronto.
How Healthy is Murray International Holdings?
Let's start off by dispelling myths which I've seem quoted by both Murray apologists and "Celtic-minded" posters on the Follow Follow message board. They claim that Murray has written down the value of loans to RFC by almost £8m and a further £4m against investments in Rangers. As an example, BlueChipBear recently claimed that around £12m of MIH's £20m profit was allocated to RFC. Wrong! Not one thin dime of this found its way to RFC.
The £8m is down to the loan notes due from Murray Sports mentioned above. MIH sold its RFC shares to Murray Sports for £61m and now reckons that it will only get £53m back. The money is not owed by Rangers. The other £4m is recognition of the fact that MIH's 7.2% of Murray Sports is no longer worth £9m - £5m appears to be the latest best guess. But I stress again that none of this money goes to Rangers. It only recognises that MIH's shareholding and loans to Murray Sports (which owns 65% of RFC) are not worth what they were. Everyone's shareholdings in Rangers are worth less than they were a year ago. Pointing this out does not see any cash flow through to Rangers.
But back to MIH. In the year to January 2003, turnover of £266m led to a net profit of £5m - £2m of which went shareholders by way of dividends and £3m was transferred to reserves. Turnover was up by 20% and operating profit by almost 30%. It all looks good. Except that the £12m of charges due to the Murray Sports shares and loan notes were enough to push the group into a loss both before and after tax, and also caused reserves to fall by £9m. These items are highlighted as exceptional - which they probably are - but they are also real.
Looking at MIH's balance sheet, it will surprise few people that it carries a lot of debt. During the year, net debt rose from £182m to £190m, and none of this was down to RFC. Now a measure of a company's financial health is a number called the "gearing ratio". This takes a company's debt and divides it by shareholders funds + debt. For MIH, this is £190m divided by £190m + £79m or 70%. A more sensitive number is the debt to equity ratio (debt divided by shareholders funds) which for MIH is 240%.
So what do gearing of 70% and debt/equity of 240% mean? Well to quote my old accountancy text-book "Gearing of 33% (debt/equity ratio of 50%) would be a reasonable level for an average company, although companies with steady profits can borrow more highly, while those in cyclical industries would be wise to have little or no gearing." So on the face of it MIH with 70% gearing looks to be highly indebted, but maybe that's typical for a company of its type?
Not really. Westfield Corp, the biggest property company in the world has gearing of 38%, while Hammerson, a UK property company has gearing of 45%. Looking at steel, Corus which now owns the former British Steel has gearing of 25%. A better example of what my book calls a company with "steady profit" would be a utility like Scottish Power, but even it seems to think gearing of 50% is enough. Now none of these companies is a mirror image of MIH - there are none - but it does show how susceptible MIH could be to a downturn in any of its businesses. Specifically, what about a downturn in RFC?
The Impact On Murray If Rangers Goes Into Administration
As I said above if RFC goes into administration then Murray Sports follows it. This would mean that the £53m loan notes and the remaining £5m in shares owned by MIH could become worthless. These two items alone would cause MIH shareholders funds to fall from £79m to £21m and see gearing rise from 70% to 90%. Debt/equity would go up from 240% to over 900%. And this ignores the impact that failure of RFC would have on any other Murray companies. What happens to Azure and Carnegie without their deals with RFC?
So if RFC goes into administration, then Murray Sports probably follows and this could have serious implications for the entire Murray Group. Viewed in this light, the £15m revolving credit facility to keep RFC afloat looks like less of an altruistic deal from a benefactor, and more like a necessary action of an interested shareholder protecting the value of his entire corporate holdings.
So Where Do We Go From Here?
If someone wants to buy Rangers, then they would need to buy the shareholding from Murray Sports, probably even Murray Sports itself. Even if they paid nothing for Murray Sports, then they would inherit a debt of £53m - effectively 142p per RFC share. Then there is the £14m of interest - probably close to £20m by now - which may or may not become payable if the ownership of Murray Sports changes.
In its current form, interest only payable by Murray Sports if it has reserves - which it probably never will. But if there is a change of ownership, the interest might become payable. Without seeing the loan agreement you can't tell.
Anything less than this could have a material impact on Murray International Holdings. To my mind this makes a deal to buy Murray out, extremely unlikely in the current climate. He looks to need 142p a share while potential buyers would be unwilling to pay such a high premium over the current price of 84p.
Against this, he is almost obliged to keep RFC afloat with inter-company loans of some sort and so administration looks unlikely too. But what seems certain is that the diet of bread and water which he have been fed on this season will continue for the foreseeable future. Sellable players will be sold, and we will shop in the bargain basement end of the transfer market.
The future may well be Orange but it does not look very bright.
Brock Stoker