Storm Clouds Gathering?
On 11 February, Andrew Hosking, the joint administrator for Derby County described the agreement with Middlesbrough as a “huge breakthrough” and told fans that they would be “pleasantly surprised at the speed things will move at now”, expecting to be in a position to announce a preferred bidder within around 10 days. He subsequently told the Supporters Charter Group meeting which BAWT attended that there were no other hurdles in the way now. So why are we now 37 days from that statement and what might be causing the further hold-up?
The Administrator told us there were complexities with the bids that had been put in, without going into details on what those complexities were. So let’s start with what we would assume an ‘ideal bid’ would look like. What we have been told, is this would involve satisfying EFL rules regarding exiting administration and settling in full the debts to MSD UK Holdings which are secured on the ground.
The MSD debts were around £20m at the start of the administration process on 22 September. Football creditors totaled around £9.5m. Other creditors, including HMRC, added up to £54m, however, this did include £6.2m of season ticket and advance ticket sales, which should now be satisfied through to the end of the season.
EFL rules state clubs exiting administration must settle all footballing debts in full, ie 100%, and all other unsecured creditors at least 25%. So on a simple calculation that equates to £9.5m + £12m = £21.5m. This assumes HMRC will accept the minimum 25% payment, which given they have preferential status, is unconfirmed. On top of that, they would be Quantuma’s fees, estimated at £2.75m from the original submissions to Companies House, plus the additional borrowing needed to cover the ongoing monthly losses of the club. Quantuma quoted these at around £1.25m per month, so 6 months into the process, we can assume that to currently total £7.5m. So £21.5m + £2.75m + £7.5m = £31.75m to buy the club, satisfy EFL rules, and cover the costs of administration. This would result in the club being able to exit via Company Voluntary Agreement, no further penalties from the EFL and the new owner should be able to extend current players’ contracts and sign new players in the summer.
This does of course still leave the initial MSD debt and the ownership of the ground to be resolved. From Quantuma’s comments about MSD, Mel Morris, and the ground and comments BAWT has heard from other parties at various times, it seems Mr. Morris may be willing to relinquish the ground on full payment of the MSD debt, ie £20m. It also seems most interested parties are only interested in owning the club if they can own the ground too.
So the ‘full price’ for buying Derby County out of administration and bringing the ground back under the same ownership as the club is around £51.75m.
In recent days, football finance expert Kieran Maguire has identified Sunderland and Ipswich as comparable clubs for valuing a League One (let’s be realistic) club, and that valuation is around £30m – but they are both clubs who own their own grounds and who have a full roster of players, with a significantly lower number of players out of contract this summer than Derby. Even ignoring that last point, what would happen in one of Quantuma’s ‘interested parties’ was willing to pay £30m for the whole package – club and ground?
One extreme is Mr. Morris and MSD hold out for full settlement of their debt, £20m. That then leaves £10m to be split between Quantuma, MSD’s additional lending, and the unsecured creditors – amounts which total more than £30m above. Even if Quantuma and MSD were willing to take a ‘ haircut’ on their amounts, that still leaves very little for the unsecured creditors, and definitely wouldn’t see the club exit administration – even if creditors accepted such a deal – within EFL rules, so the club would start next season with a 15 point deduction. That wouldn’t make promotion impossible – Leeds achieved it in 2007/8 - but the need to build a virtually new squad at the same time likely makes next season a write-off on that basis, so any new owner then has to accept any losses in that season will not return any success.
The other extreme is that the £30m goes to the football club, Quantuma, and MSD’s additional lending. That then leaves nothing for MSD/Mel for the stadium. MSD’s debt is secured on the stadium, and unconfirmed rumors suggest also other guarantees from Mr. Morris. So in return for the non-fulfillment of the debts owed to it, MSD would take ownership of Pride Park, the buildings at Moor Farm also covered in its security package and other security pledged to the loan if they exist. This might save a new owner £20m, however, they still wouldn’t own the ground, so would be paying rent to MSD – a wild guess would be at a similar value to the assumed c10% interest DCFC was paying on the loan – or would have to negotiate a sale with MSD, ultimately still having to pay the £20m, or possibly more, in future.
So what if no one is willing to even pay c.£50m for the clean exit, or even c.£30m for the scenario above? And is this a likely outcome now? I’ll take the second question first.
Yes, with every day that passes liquidation is a step closer. Quantuma said the club is funded until the end of the season. That is now less than eight weeks away. Two weeks after that, players whose contracts are up in the summer are free to make pre-contract agreements with any other clubs. At that point, the value of Derby County falls to virtually nothing. Forget £50m or £30m, we are talking £3m-£5m.
If you can, after all, we’ve been through, put your emotions aside and think about the options for a hard-headed businessman's point of view. Pay £50m now for a club that is worth maybe £20m-25m? Pay £30m for a club of similar value, but with a season that might cost you another £5m-6m with promotion a virtual impossibility? Or wait and see if you can’t hoover up the remnants for a few million and hope the value of us as fans is worth investing in?
The big question around the last option though is what happens to Derby County as a football club. Well in liquidation the club ceases to exist, as happened with Rangers in Scotland and other clubs in England that have suffered the same fate. A new club can form, but it would need a different name – AFC Derby County or something similar. And then the crucial questions – what league would it go into?
Precedent suggests such clubs have to start at Step 5 or 6 of the non-league pyramid. Ilkeston and Macclesfield are two such local examples. In all honesty, not even £3m-5m is worth paying if that’s the case. And if that is the case, the new phoenix club won’t have a need for Pride Park for a good few years, so MSD will be sat on a white elephant worth virtually nothing. They could sell it for more commercial units, but the demolition costs will probably outweigh the sale price of such property. That last scenario gives fans some hope that interested parties may be playing brinksmanship with MSD and/or Mel Morris, hoping that they will prefer to get something rather than nothing and that they can get the whole package for a more reasonable amount, either with or without the 15 point penalty next season.
The unfortunate point to take however is that the lack of news flow is likely to continue right up until the last minute of the last hour – which looks like some time in May – and it could still end up in liquidation. This could be the calm before the biggest storm yet.