Questions Submitted to CLUB 9 SPORTS from SWFC Supporters
It is our practice and management style to conduct ourselves with openness and candor, however there are certain confidentiality agreements that prevent us from sharing information concerning third parties or information which is protected by Non Disclosure Agreements. We appreciate the opportunity to respond to these questions and hope this information is helpful in your gaining some clarification of the issues surrounding our offer to the SWFC Board Of Directors. -The Management of CLUB 9 SPORTS, LLC
Q: Has the capital for the second (£3m) and third (£5m) already been raised? Are you able to supply proof of funds for the whole £10m?
A: CLUB 9 SPORTS is a subsidiary of Prometheus Capital Partners, a merchant bank. While we do invest our own dollars into deals, we also partner with other co-investors. Those co-investors are typically either High Net Worth individuals or Institutional investors who invest with us such that we are the “managing member” of the company and so that our management team can affect the changes and improvements in the acquired company. In the first step of raising additional capital, we provide an investment memorandum to our pool of investors to seek interest. We then work with the most interested and most strategic investors to secure their “soft” commitments. Once our due diligence (accounting audits, legal review, management assessment, etc...) is complete, we develop the outline of an offer and discuss that with the target company and its board, management and lenders. Once the basic terms are agreed to in follow on meetings, we verify our investors’ interest and amounts of capital proposed in exchange for equity interests and estimated ROI. All of the aforementioned steps were complete in March. The final step in the process is to have the lawyers representing the target and any other lenders or creditors document the agreement (previously reached) in the form of formal, definitive agreements. These agreements are used as proof that the target is willing to accept a transaction as we have proposed it to our investors. Our investors then have these agreements reviewed by their advisors, accountants and lawyers before agreeing to fund the transaction. The final step is the signing of subscription agreements by our investors, which is followed by the wiring of the capital into a special purpose escrow account. We have been requesting the definitive agreements from the club and its representatives since March. Since the club has been unable to deliver these agreements, we decided to make a formal offer to the board now with the capital CLUB 9 SPORTS is investing itself. In our view, the delay in putting capital into the club has already had a negative impact. We believe £2MM now for a significant minority stake is better than trying to run the club with strained cash flow and no ability to fund real improvements on the pitch or in the business operations. No one else has come forward to provide a cash infusion and with this investment, CLUB 9 SPORTS now becomes one of the major shareholders inside the club – on par with others and facing the exact same dilemma. If the balance of equity does not come in, CLUB 9 SPORTS has the most to lose. Our capital is at risk. Our share value is at risk. We are aligned with other shareholders in this regard, which is appropriate. In our view, this provides every means of pressure the club could want on us to improve the business and commit the capital. We have provided, under the strictest of legal confidence and consequence, the list of investors that CLUB 9 SPORTS has “soft circled” for providing the additional £8MM in the next tranches of investment. It is important to note that the follow on investments are dependent upon our ability to affect changes within the organization (which is why we were looking for board control). We can not show evidence of all of the future “hard” commitments until we achieve certain operational changes.
Q: Despite your backing of Lee in last night’s radio interview, are the whispers that the deal was rejected as it saw Lee lose his position true, or is it just scaremongering?
A: That is a good question for others in Sheffield. We stand behind our belief in Lee’s abilities and our plans do not call for Lee to be removed. One of our concerns with this club does involve a lack of cohesiveness and alignment of interests inside the board. When businesses fail or falter, it is often as a result of too much “inward facing” as opposed to “customer facing” activities. It would be our goal to bring together the right individuals to ensure the board is functioning appropriately and robustly in the best interests of shareholders, fans and creditors.
Q: After 7+ months of negotiations, how is it possible that an offer was submitted that was so unacceptable to be rejected out of hand without it even being put to the shareholding, and moreover how on earth was it such an apparent surprise to you that it was rejected?
A: Our offer was substantially the same as the agreement of terms reached in March. However, to be fair, we did change the timing of the capital infusion and provide a proposed figure for the management fees. Regardless, we do not believe the offer should have been rejected out of hand. One of the most important considerations should have been the total enterprise value we assigned to the club. We boosted that by almost 50% since our offer in November, thereby creating greater value for current shareholders. We also think that making a commitment after the relegation, despite the huge losses in guaranteed media revenues, demonstrates our long-term commitment and belief in SWFC. In the least, we would have expected a discussion or counter proposals given the board’s stated interest in continuing to look for investment, but not a flat rejection. At some point early last week, we began to get signals from certain parties inside the club that our new proposal was acceptable to some and not to others. So, we were not surprised that the offer was not accepted completely. We were quite surprised that it was flatly rejected without discussion and that it was portrayed in a negative light in an obvious attempt to sour the public’s view of CLUB 9 SPORTS and our offer.
Q: Help us understand how injecting a very small amount of capital which you then withdraw by way of management fees over a short time, helps the club move forward. If said capital is spent on for example, players, then if promotion is not achieved, other than player sales, how will sufficient cash be generated to pay your management fee?
A: We do not consider £2MM ($3MM) to be a small amount of capital to put at risk. While our management fees are not insignificant, we believe they are absolutely necessary to affect the kind of turnaround that this club requires to get back to its former days of glory as a member of the EPL. We will explain in more detail what the management fee covers in the next question. The fees will more than be recouped by the club via increased revenues, player recruitment/signing savings and overall rationalizing of total cost structure. The fees will not be pulled from committed capital to grow the business and sign players, but will come directly from the club’s operating SG&A budget. Even at £420K per annum, it would take almost five year to pull out the original amount and 24 years to pull out the total committed capital investment of £10MM. So the theory that we are charging a fee to recoup investment is invalid. The management fees are not a fee for capital, but rather a payment for actual, active services that will be provided by CLUB 9 SPORTS staff, some of which will be offset by decreases in the current SWFC budget. The management fees will be subject to budgetary constraints, thus, if we do not manage the club appropriately and create the revenue those expenditures are meant to create, it will be subject to adjustment. We would adjust that fee as a good manager should.
Q: What does the club get in return for the not insignificant management fee or is it just a way to recoup the 'investment'?
A: CLUB 9 SPORTS will be dedicating its Operating Partner, Jon Pritchett, to spend a large portion of his time on this investment. That means Jon would be actively engaged in leading the club’s commercial business operations, working closely with Nick Parker, and would be a member of the board. John Prutch, Managing Partner of Prometheus Capital Partners, will be committing significant time to Sheffield on the player development and football operations area, working closely with Alan Irvine and Sean McCauley. John would also become a board member and would head up the Advisory Board, comprised of a group of highly respected and well-known individuals from the US and UK. Jim Thompson, CFO of Prometheus Capital Partners, will be leading the finance and accounting functions of the club, working closely with Nick Parker and the board to ensure proper financial controls and reporting systems are in place. Joshua Prutch will actively interface with the club and US-based strategic partners on our player development program. In addition to Jon, John, Jim and Josh, CLUB 9 SPORTS has begun the process of recruiting a SVP of Sales & Marketing from one of the “big three” leagues in the US to join SWFC as the head of all commercial sales. This person will relocate to Sheffield and bring with him/her the best practices in the area of fan engagement, sponsorship solicitation, event production, ticket sales and service and hospitality functions. He/She will report directly to Jon Pritchett. The club would never be able to afford this level of operational talent or relationships without the management fee component.
Q: If you have £10M available then why such a modest initial injection at a time when we are crying out for cash?
A: We would like nothing more, but it economically doesn't make sense. The club’s current performance and value can not justify an investment of £10MM. Our co-investors have said so. We believe the board’s long search for such a large amount and the fact that no one else is prepared to make such a commitment is an indication that the capital market believes the same. There are two reasons for the proposed structure at this time. We touched on this in one of the answers above. We are not prepared to put in the additional £3MM today. We are prepared to put in £2MM today and begin to affect the turnaround. We are willing to commit to the £3MM coming in within a defined period of time as needed, such as before the 2011/12 season. We have never been willing to commit the full £10MM at closing. We believe the club does not need to use more than £5MM in the first year and needs to be very disciplined about how the capital is used. It is also important not to unnecessarily dilute the existing shareholders. Our belief is that the club should be able to return to the Championship in 2011/12 and will need the remaining £5MM for that effort and for very specific capital improvements at Hillsborough and the Training Academy. For example, the fans deserve two have state of-the-art video boards at Hillsborough and a fan’s bar to meet demand for improved beverage service. We also want to make certain improvements in the Locker Rooms, Academy and Training Grounds for the purpose of recruiting better players from around the world. On the player development side, we have plans to partner with specific MLS, NASL, USL and PDL clubs in the US and with NCAA schools there to develop a system that allows SWFC to attract emerging talent from the football world without being completely reliant on huge player acquisitions and loans to field a wining side.
Q: What can us, the fans, expect in both the short and long term, should you be successful?
A: Perhaps the best way to answer this is by providing a list of short-term and long-term goals? Short-term: Stronger balance sheet Less debt on the club Money for Alan to make certain key player moves A unified board of directors Enhanced fan experience at Hillsborough Winning brand of football with a fighting spirit at all times Long-term: Return to the Championship and eventually EPL Modernized and possibly expanded Hillsborough International growth of the SWFC brand Best practices from a commercial operations perspective Club with a value of 5x today’s valuation 80% stadium capacity utilization versus 55% today
Q: What in your opinion is the main reason for your initial offer to be rejected, and when do you expect a follow up offer to be proposed?
A: We are not sure why the board would reject an offer at a value that has not been offered for a League One team as far as we know? That is a very good question. To speculate or reach any conclusions would not be fair to any of the parties involved. We remain hopeful that the club will re-engage with us so that a productive dialog can resume. For now, we remain interested in trying to reach agreement.
Q: Do you or your backers regret that it took so long to table a deal that the time to help had passed? A small injection of capital to show willing could have saved our season and your investment.
A: We do wish that this transaction had moved faster so that we could have impacted the past season. With some capital available, we believe Alan could have staved off the relegation. However, we do take some responsibility for the time that was required to get to an agreement. More importantly, we believe all the long-term reasons we want to invest in the club remain in place. While the fall to League One is unfortunate, we do not think it seriously impacts our ability to affect the long-term turnaround. Having said that, we firmly believe that if no investment is made in the very near future, the club could find itself mired in the lower level for some time. Ultimately, we’re betting that the fan support for a winning Wednesday side will be the engine for driving the club back. The key is to ignite that engine. It has been without fuel for far too long. SWFC can not afford to have a generation of fans never experience the winning ways of the past. We need to get on with improving the club as soon as possible.
Q: Do you have the additional £3m available now? If so, why not pay the full £5m as it's suggested was the original agreement? If not, where and when do you expect to find it?
A: There is no denying that the relegation slide of the last two months of the year caused our committed capital providers to get very nervous. Some of them backed away and some of them decided to commit capital only upon return the Championship. Others remain committed, pending the definitive agreements from the club and after we can demonstrate that the club has been stabilized. As of right now, we can only commit to £2MM. As we have said, this is still a significant investment at an important time and puts CLUB 9 SPORTS in a position as the largest provider of risk capital within the club as we remain behind the Co-operative Bank in terms of their senior creditor position. As mentioned before, we are willing to commit to a time frame of not later than the beginning of the 2010/11 season for the balance of the investment. Without the additional capital, we can’t get a majority ownership position in SWFC, which is our goal. In other words, as the largest shareholder, CLUB 9 SPORTS will have more incentive than any other party to see that the full £5MM is invested.
Q: If / when your offer is accepted, does it still leave LS at the club as Chairman or in any other capacity?
A: Our current plans include working with Lee as the Chairman. We have had conversations with Lee about his short-term and long-term goals and plans. In our opinion, Lee has a lot of value to bring the club in any number of capacities. He is a life-long fan and he embraces the use of new technologies – both of which are important and attractive to us.
Q: What do you hope to get out of being a part of Sheffield Wednesday, our club?
A: We like getting up in the morning and going to a job we love - and we love the business of sports. Our goal is to create a globally recognized sport brand in SWFC. Our goal is to win championships and provide fans with a great experience in return for their commitment of discretionary dollars and consistent support. We like growing companies and doing turnarounds. We like the sports business. John Prutch has been involved with the sport of football throughout his life and his children all played competitive soccer into their adult years. We like Sheffield. We recognize the club is a tremendous community asset and we respect that. We also believe we and our investors (and current shareholders, note holders and lender) can do very well financially over the next ten years. It is our belief as devout capitalists that a long-term profit motive can bring tremendous value to SWFC, its fans and supporters.
Q: Please provide absolute proof of the total sum of committed irrevocable funds you have available TODAY for SWFC.
A: That seems a bit more like a demand than a question. We have £2MM committed today. We are not sure how we can prove that to the fans other than coming to a final agreement with the board and wiring the money.
Q: Will the proposed 40% ownership be a share placement, and if so, how will you fund the share placement and at what price per share?
A: It will be a share placement in the operating company. This means these will be new shares issued. As currently discussed, we would buy those shares at a price of £2 per share or a total of 1,000,000 shares. The current shareholders would own the remaining 1,600,000 shares.
Q: You have stated this is the best ever offer for a League One club, yet it’s widely acknowledged Southampton were purchased for around £12m and you are looking to acquire a controlling interest in SWFC for just £2m. Can you explain this?
A: This can be a bit misleading and is really a misrepresentation. When calculating the value of the club, we need to multiply the number of shares outstanding times the share price and add the value of the debt. We are only acquiring a minority interest for £2MM. The value of the club, after our £2MM investment, is approximately £23MM. Upon the full investment of £10MM, the value of the club will be £31MM ($47MM). We are not aware of another League One club that has been valued at an amount greater than this. The result is the value we are placing on SWFC is almost twice the value that was paid for Southhampton. This actually validates the fact that our price for the team is fair.
Q: Did Club 9 have any input into the retention of Brian Laws and the recruitment of Alan Irvine?
A: No, we have not been involved in making decisions for this club in any way. Lee and Nick have been keeping us abreast of major strategic decisions that might impact the future. We have provided our opinions on certain matters when asked.
Q: Why has the deal taken 7 months to complete when many other deals for football clubs seem to be completed in a matter of weeks?
A: We hope the above answers have provided some insight as to the relative complexity and time needed to complete the transaction.
Q: Did you ever show the club proof of funding and if so, for how much? If not, why should we trust you and hand over 40% of the company, when you might turn out to have no further cash.
A: We hope the answers above fully explain the matters of how the funding process and mechanisms work and why we believe this remains a very attractive offer for the club. Specifically in regards to the 40%, we will only own 40% (actually 38%) when we invest the £2MM. Given the value this places on the team, we are paying a fair price for the ownership we receive.
Q: Can you supply details of other sporting transactions you have completed and how successful they have been?
A: There have certainly been a lot of questions about the history of CLUB 9 SPORTS. It is important for everyone to understand that CLUB 9 SPORTS is a subsidiary of Prometheus Capital Partners and was only formed in the summer of 2009. The principal owners of CLUB 9 SPORTS are Jon Pritchett and Prometheus Capital Partners. While Pritchett and Prutch both have significant experience in a variety of successful businesses at the most senior levels, Prutch is primarily an investment banker and Pritchett is primarily a sports business executive – though they both have overlapping experience. One critical distinction that should be understood is that we are Operators first and Investors second. We are not like other high profile American investors that are well-known in the UK today. We are not using debt to leverage the club. We are, in fact, actually de-leveraging the club to make it healthier. The professionals at Prometheus Capital Partners have participated in ten principal transactions (transactions like this one where the principal made the investment) and advised in over 150 transactions (where principal advised a third party in closing the transaction). To understand the significant depth of the Prometheus Capital Partners organization, it really helps to know who we are and what we have done over time. Unfortunately, the company web site does a poor job of communicating this breadth and depth. In order to better explain this, CLUB 9 SPORTS will provide a PDF of a PowerPoint presentation that interested viewers can click and read. We hope you will be impressed with the level of broad talent we have within our organization. As the saying goes, “you can’t judge a book by its cover…or its web site.”
A message for the supporters from CLUB 9 SPORTS, LLC:
Willingness to achieve the goal of the CCC or the EPL, requires capital, expertise and discipline, and cannot rely solely on hope or history. Yesterday has been determined, but tomorrow has yet to be defined. When all seems dark, remember…we’re Owls.
