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Man United and Private Equity

Malcolm Glazer has succeeded in gaining control of Manchester United and taken the company off the stock market. In that respect, Man United has followed what has become quite a common trend over the past few years of public to private (P2P) deals, although usually with the buyer being one of the major Private Equity houses as opposed to an individual investor. What is interesting about all this is that banks seem happy, not to say eager, to join the party.

Generally speaking, the risks associated with a business remain the same regardless of its capital structure. If the new owners run it pretty much the same as before, then the sales and profits (not counting interest) have just the same risks whether the company is public or private. What has changed is how those risks (and the associated rewards) are shared between debt and equity. If you increase debt and reduce equity, there is less money available to shareholders if the business fails (the banks get it all), but if the business prospers then the shareholders get all the profit after paying the higher interest. However, increasing the debt reduces the security available to the banks and effectively increases the amount they stand to lose if it all goes wrong. If the banks get rewarded for this increased risk then fair enough, but the suspicion is that they probably don’t.

If a company’s pension fund has a shortfall the banks could find themselves nursing some nasty bad debts. What’s the betting that pension schemes will at some point in the future be classed as preferential creditors in the event of liquidation?

 

  9 October, 2008 © 2008 K.R.Wade and Co Ltd prev page next page