Apples and Pears
Presently, we await the decision of the Supreme Court on whether to hear the application from Otium, SBS&L and Arvo to hold a Judicial Review into the circumstances of the ACL share sale.
As with the first Judicial Review, the applicants lost heavily in both the High Court and the Appeal Court. That is not to say they won’t be permitted a further hearing, which would certainly prolong the agony for all concerned, not least supporters of CCFC with the club’s future teetering on a precipice.
The 23-page judgement from the Court of Appeal deals with a complex case and the law relating to those circumstances. However, some key passages sum up the decision.
“For the reasons given in this judgement I now hand down the appeal in this case is dismissed and the order of Mr Justice Singh [High Court Judge] of the 20th of July 2017 is upheld.”
“I would dismiss this appeal and would uphold the order made by the judge, refusing permission to apply for judicial review.
“As I have said above, I consider that the judge was correct to refuse permission to apply for judicial review, on the basis that Sky Blue’s [the Applicant’s] case was based essentially on a comparison between “apples and pears”. Lord Justice McCoombe, October 2018
The “apples and pears” reference concerns two differing valuations, which when compared show a distinct difference between the value of the ACL shares under different circumstances. The first valuation by KPMG, one of the world’s foremost firms of financial advisors, was commissioned by Coventry City Council to assess the price at which it should sell its shares to Wasps. The second by leading property consultants, Strutt & Parker, was obtained by Wasps in support of a bond issue to raise the finance for the acquisition.
It was the difference in these valuations which gave rise to the argument by the Applicants that Wasps underpaid for the shares by approximately £28 million. In dismissing that comparison as invalid, Lord Justice McCoombe clearly disagreed. His decision was supported by two other very senior judges, Sir Brian Leveson and Lord Justice Irwin.
Just to clarify, the judgement did not express any opinion as to whether the valuations were correct, only that the conditions and assumptions attaching were very different, so comparison between the two was not meaningful.
There is an alternative way of reaching the same conclusion about the price paid by Wasps, one based on the actual events described in this history as opposed to theoretical values arrived at in the KPMG and Strutt & Parker valuations.
There are many different approaches to valuing businesses and shares. There is actually only one real way of determining value, which only occurs when a sale and purchase is completed.
Experts in the field of Corporate Finance will generally agree that the true value of a business (or in the case of ACL, 50% of the business) determined in the context of other terms, conditions and structures agreed, is the price which a willing buyer offers and a willing seller accepts.
In the instance of the sale of Coventry City Council’s shareholding, the price agreed with Wasps was in isolation. However, the Higgs’ shares were subject to two bids: one from Wasps and the other from Otium via the Liquidator of CCFC Limited.
With a single bidder for shares, in a non-competitive market, the value agreed is less certain. When there are multiple bidders and multiple sellers in respect of identical parcels of shares, the value achieved becomes far more definitive.
The Wasps offer to Higgs was exactly the same as that agreed with the Council for equivalent shareholdings. As described earlier, the Otium offer had a greater headline price but the “apples and pears” factor of conditional versus unconditional bids meant the Wasps offer was more attractive to the Higgs’ Trustees.
Therefore, two willing sellers agreed the exact same price with one willing buyer. Furthermore, let’s remember two quotes from the failed bidder in this auction:
“…. we have made a very generous offer”;
“…. the liquidator’s offer for the charity’s 50 per cent stake in the Ricoh Arena was generous – around £2.8 million – and guaranteed above market value price”;
statements made by Tim Fisher - Chairman of Coventry City FC, the sole Director of Otium, co-director of SBS&L - or with his implied consent, which completely undermine the case which Otium, SBS&L and Arvo continue to pursue against the Council which implicates Wasps.
Of course, I am not a Supreme Court Judge and those most senior Justices may take a different view. But I do have extensive experience of business acquisitions and disposals and in my opinion, the differential valuations are largely irrelevant to this matter.
The value of the shareholdings in ACL was determined by this quasi-auction in Autumn 2014. Therefore, the core of the case advanced by the Applicants, controlled by Sisu, appears to have no merit.
The existence of the KPMG valuation is however important in one other respect, as it shows the Council following good practice in checking that the price offered was reasonable.