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Sunday, July 07, 2013

More On The Share Issue


For those Hereford United supporters and others who are not shareholders of the club and therefore haven't received the proposals for the share issue, here's some background.

In essence the proposed share issue is for the 'placing of up to 6,120,000 new Ordinary Shares at a price of 25 pence per Ordinary Share'.

In addition there is a proposal that up to of the 75% of Existing Loans (to the club) could be converted into Ordinary Shares.

And finally the club wishes to adopt 'New Articles of Association'.

These proposals will be discussed at a General Meeting of Shareholders on July 22nd. 

The directors are hopeful that shareholders will agree to five resolutions at the meeting to allow all the proposals to go ahead.

In the documents sent to shareholders chairman David Keyte sets out the reasons why the board feels the share issue is needed.

As before Keyte says that relegation from the Football League has cost the club a lot of money. Shareholders at their last meeting suggested that the club needed to 'avoid continuing in a hand to mouth situation' so directors have proposed a number of projects which if 'fully funded' through the proposed share issue will help the club generate profit.

In the year ending last May the club lost around £430K and the club goes into the current season with another drop in funding from the Football League

Should the share issue be fully subscribed then the £1.5M raised would be used for five projects.

a - A 1200 seater stand at the Blackfriars End of the ground. With grants of up to £400K, it's thought the club will need to find around £450K.

b - Reshaping the Meadow End to increase the amount of area behind the stadium which then could be used for 'commercial/residential development'. Cost £300K

c - Pay off loans received towards the refurbishment of the Starlite Rooms. Cost £225K

d - Improve the stadium generally and specifically to attract Debenture Holders. Cost £75K

e - Develop the Aylestone Park training ground project. Cost £450K.

(BN note - the documents do not make it clear should the issue not be fully subscribed which projects would go ahead)

The details of the issue are that the company (Hereford United 1939 Ltd) proposes to raise up to £1.5M by way of placing up to 6,120,000 new Ordinary Shares at 25p each. There is no minimum amount that has to be raised for the issue to go ahead. As BN understands the situation these 'new' shares will be in addition to the 39,670 Ordinary Shares currently in issue.

(BN note - the documents don't mention if or how current shreholders will benefit from these proposals. And that poses a potential problem for the board - why should current shareholders vote for these proposals if their shareholdings are to be lumped in with up to 6,120,000 new shares. Take the case of HUISA for example. They are one of the clubs largest shareholders with around 7% of the shares. If the new issue is successful then their 7% will be almost neglible. Originally it was thought existing shareholders would receive four new shares for every one they currently own but there is no mention of this.)

As well as the 'up to £1.5M' there is the possibility, perhaps probability, that those directors and others with existing loans to the club will convert their loans to shares. This subject is called 'Loan Conversions' in the documents.

Currently there are loans to the club totalling £880,000. The proposal is that £660,000 or 75% of the loans might be exchanged for shares.

'The directors consider that it would be in the best interests of the Company and Shareholders generally if the Company's balance sheet were further strengthened by elements of these loans being capitalised'

The directors say they are aware that there could be claims of a 'conflict of interest' in this proposal which is why they have asked shareholders to vote on it.

(BN note - if this proposal isn't approved it's unlikely the issue will go ahead. Without the ability to exchange loans for shares the balance sheet will continue to show that the club has few if any assets. However if the proposals do go ahead then the directors could own a larger percentage of the club than they currently own )

The shareholders will also be asked to approve 'new articles'

'The Board is of the view that modern articles of association should be adopted by the Company as they more fully reflect modern company law to which the Company is subject'.

Overall it looks as if the letter and documentation about the proposed share issue has been released without being double-checked.

As noted earlier there is no provision for existing shareholders which means their current percentage holding in the company will be much, much lower.

There is mention that 'members of the public are not eligible to take part in the Placing'. BN isn't sure what this means as Keyte has repeatedly mentioned that he would like to see outside investment in Hereford United. The documentation then talks about 'Qualified Investors' which BN understands to mean 'people who have to have carried out €40,000 of securities trade in the last year'. If correct hat probably rules out the vast majority of supporters and other interested parties. Hopefully the club will clarify this.

And there are several other 'typo-mistakes' in the documents. For example it is initially suggested that upto 75% of the existing loans could be converted into share. Later on that figure has dropped to 70%.

The second resolution that shareholders will be asked to vote on also appears to be incorrect where it states a figure of £2,160,000 when it should be £1,500,000.

There's little doubt there is a lot for shareholders, and potential shareholders, to discuss about these proposals. And some clarification is required about certain points as soon as possible.