How does this work?

[A Load of Squit 5,116]

I know our board have converted loans into shares in the past but I''m confused as to what Roman Abromovich is up to. Here the story from todays 365 Mediawatch.

"How Does That Work?
Riddle us this dear readers.

As part of the Chelsea accounts, the club announced, via chairman Bruce Buck:

"Following the conversion of half of the interest-free loans into equity there should now be no doubt as to the owner''s commitment to the club and the stability of the company''s funding structure."

So essentially Roman Abramovich has converted around £300million of ''debt'' technically owed to him by the club into shares.

That would be shares in the club that he and he only already owns in its entirety.

We''ll say again - how does that work? "

Can one of you clever financial types (the ones who like to talk about fixed tangible assests) explain whats going on?

 

[The Fish Seller 0]

I should imagine that he has done a share issue to raise capital and used what the club already owe him to buy the shares. This works because the club no longer have a ''debt'' of £300m to RA so the club really is worth £300m more.The advantage to RA is that he can sell shares to third parties now to recoup some of that outlay yet still retain a majority shareholding or in the very least he retains a tangible asset with a market value for his outlay ie. £300m worth of Chavski shares..When we had the share issue a few years back, imagine if the £2m or so worth of shares had all been purchased by Delia and MWJ instead of the Public.If D & MWJ had made a loan to the Club of £2m prior to this they could have purchased these shares by using the debt owed them by the Club. No cash as such would have been raised but the Club would have been worth £2m more since the share capital valuation had increased by £2m and the club debt had decreased by £2m.It''s basically the process under which Delia and MWJ have been hoovering up shares over the years by converting loans to shares but on a much larger scale.

[canary cherub 1]

"That would be shares in the club that he and he only already owns in its entirety."

I don''t think that''s correct.  Abramovitch is the majority shareholder. 

The club is owned by a company called Chelsea Village whose shares are traded on the open market.  Abramovitch bought a majority shareholding in July 2003. 

 

[Bobzilla 131]

The ''he already owns it entirely'' point is irrelevant. Suppose you have a cake, and you cut it up into 20 pieces. You then cut up each piece into 2. How many pieces of cake do you own? How many did you start with? You still have one cake, but there are twice as many pieces.

But to take the analogy further, suppose you add a second layer to the cake before you cut each piece in half, so that what you end up with is actually twice as much cake in the same size pieces as before.

That is what he is doing here - he''s making the big Chelsea cake bigger by essentially writing off a debt owed to him by the company, and giving himself more slices to compensate for this write-off.

 

And its tangible fixed assets. A tangible asset is any asset you can touch and feel (i.e. not emodied in a bunch of rights), but on a balance sheet, the split is between fixed (for use in the business over many years) or current (for consumption within the business over the next year). Tangible/intangible is then a subdivision of fixed assets (and also potentially current assets). But you''r probably bored already.

[canary cherub 1]

Cheers Bobz.  I agree the first point isn''t relevant to the argument but it was an incorrect assumption nevertheless.

I guess you can''t really compare it with Norwich since our shares are not traded on the market, the purchase price is fixed (on what basis I have no idea).  What effect, if any, do you think Abramovitch''s purchase will have on the price of Chelsea shares?

 

[PurpleCanary 5,554]

Unless I''ve misunderstood this, which is distinctly possible, Chelsea FC plc is now longer owned by Chelsea Village, and is no longer a listed company. Abramovich delisted it when he took over. That would fit in with the idea that he has converted debt into new shares.If Chelsea were a listed company that would be a different proposition, affecting the share price, apart from anything else.According to the report on the Chelsea website the shareholder loans have been reduced to (only!) £339.8m. while the shareholder capital/equity has been increased to £369.9m. Presumably it had been around £70m.The other thing that struck me from the Chelsea report is to do with spin. Norwich City is often accused of spin, but I think this takes the biscuit:

"Chelsea has

also conducted independent research by TNS (October 2008) that indicates the

club has 110 million ''core'' fans globally, an increase of 20 million on the

previous research."Just the 110m core fans! I had no idea Stamford Bridge was that big...

[A Load of Squit 5,116]

[quote user="Bobzilla"]

The ''he already owns it entirely'' point is irrelevant. Suppose you have a cake, and you cut it up into 20 pieces. You then cut up each piece into 2. How many pieces of cake do you own? How many did you start with? You still have one cake, but there are twice as many pieces.

But to take the analogy further, suppose you add a second layer to the cake before you cut each piece in half, so that what you end up with is actually twice as much cake in the same size pieces as before.

That is what he is doing here - he''s making the big Chelsea cake bigger by essentially writing off a debt owed to him by the company, and giving himself more slices to compensate for this write-off.

 

And its tangible fixed assets. A tangible asset is any asset you can touch and feel (i.e. not emodied in a bunch of rights), but on a balance sheet, the split is between fixed (for use in the business over many years) or current (for consumption within the business over the next year). Tangible/intangible is then a subdivision of fixed assets (and also potentially current assets). But you''r probably bored already.

[/quote]

Thanks for explaining that guys.

So you can have your cake and add a layer to it, subdivide it, make it worth double and eat it.

No wonder the worlds in a financial mess.

 

[GMF 736]

[quote user="Bobzilla"]

The ''he already owns it entirely'' point is irrelevant. Suppose you have a cake, and you cut it up into 20 pieces. You then cut up each piece into 2. How many pieces of cake do you own? How many did you start with? You still have one cake, but there are twice as many pieces.

But to take the analogy further, suppose you add a second layer to the cake before you cut each piece in half, so that what you end up with is actually twice as much cake in the same size pieces as before.

That is what he is doing here - he''s making the big Chelsea cake bigger by essentially writing off a debt owed to him by the company, and giving himself more slices to compensate for this write-off.

 

And its tangible fixed assets. A tangible asset is any asset you can touch and feel (i.e. not emodied in a bunch of rights), but on a balance sheet, the split is between fixed (for use in the business over many years) or current (for consumption within the business over the next year). Tangible/intangible is then a subdivision of fixed assets (and also potentially current assets). But you''r probably bored already.

[/quote]

This analogy is very good, although you must have regard to the Authorised Share Captial (the maximum number of shares a company can have, which can only be changed with an AGM resolution) and the Allocated Share Captial (being the shares actually sold to date).

If, using the above example, the Authorised Share Captial is currently 20 pieces of cake, but only 10 pieces have been allocated, then he can swap his loan debt for up to ten further pieces of cake.

If the cake is currently fully allocated, he can only make the cake bigger by a further AGM resolution to increase the Authorised Share Capital further to enable him to take up the then unallocated slices of cake, assuming the resolution is passed.

[PurpleCanary 5,554]

Gazza''s distinction between Authorised and Allocated or Allotted share capital has some small relevance to Norwich City plc.In October 2007 the nominal or authorised (ordinary) share capital was increased by 33,000 shares - from 535,000 to 568,000 (round figures).Unless things have changed recently, very few of those 33,000 shares have been allotted - ie, sold. So they would be available for a minority investor to buy if  the club wanted to make them available, and if there was someone out there who wanted to buy. Not relevant to any takeover bid, since the tranche of 33,000 shares is way under 10 per cent of the total, but useful as a way of raising a million.

[GMF 736]

[quote user="PurpleCanary"]Gazza''s distinction between Authorised and Allocated or Allotted share capital has some small relevance to Norwich City plc.

In October 2007 the nominal or authorised (ordinary) share capital was increased by 33,000 shares - from 535,000 to 568,000 (round figures).

Unless things have changed recently, very few of those 33,000 shares have been allotted - ie, sold. So they would be available for a minority investor to buy if  the club wanted to make them available, and if there was someone out there who wanted to buy.

Not relevant to any takeover bid, since the tranche of 33,000 shares is way under 10 per cent of the total, but useful as a way of raising a million.[/quote]

And the crucial point is, PurpleCanary, 33,000 shares at £30 a go is £990,000 in potential new capital. Not to be sniffed at but hardly likely to bring about a radical change to the Club''s finances. 

[PurpleCanary 5,554]

Indeed not. The club''s finances will only be radically improved if substantial new investment is found by either or both of the two firms hired by the club for that purpose. That investment could be by way of new owners or new minority investors. In the latter case, the 33,000 unallotted shares could come into play, but only as part of the solution.