Southampton deal: Extra time for China soccer spree

Beijing may have thought it had called the final whistle on expensive football deals, but more sales are in the pipeline after a Chinese tycoon snapped up a top English club.

Who said China’s overseas football dealmaking was doomed?

Monday's news that English Premier League club Southampton was now in Chinese hands proves otherwise – and dealmakers believe it could kick off a new round of purchases, as Chinese buyers take inspiration from how the Southampton deal managed to feint past Beijing's M&A restrictions.

Gao Jisheng, founder and chairman of Chinese stadium builder Lander Sports Development, formerly Lander Real Estate, has bought a controlling stake in the club known as The Saints, the latter confirmed on August 14.

It puts an end to the a year or so of talks between the two parties. Gao was forced to scrap a plan to acquire the club via his domestic business entity (see graph below) amid doubts over whether key government bodies, including China’s foreign exchange market watchdog and top economic planner the National Development and Reform Commission (NDRC), would approve it.

While details of the sale have not been confirmed, Gao and his family signalled that they would buy an 80% stake in the club on England's South Coast in an April filing to the Shenzhen stock exchange. The price has been widely reported as around £210m ($270 million). Previous owner Katharina Liebherr retains 20%.

Dealmakers are obviously thrilled by the news, which they see as a silver lining, after being told since late last year that Beijing’s crackdown on "irrational" deals would doom football club investments.

“It’s real, deals are happening now. And as the Southampton deal has gone through, my email and phone have gone crazy this morning because the Chinese were like' wow', they could actually do deals, so the market is getting red hot again,” Alexander Jarvis, chairman of Blackbridge Cross Borders, told FinanceAsia on Tuesday.

Investor appetite for football clubs is growing despite setbacks earlier this year, according to Jarvis, whose firm has advised on several football deals involving Chinese investors. “I’m convinced we are about to see a new wave of Chinese acquisitions,” he said. The previous Chinese frenzy followed Chinese President Xi Jinping's call for an expansion of the nation's football power in 2015.

A second source, who advises Chinese football acquisitions in Europe on the buyer side, confirmed there were now several football club deals happening, but declined to name the buyers.

At least one more European football club has been sold to a consortium that includes a Chinese investor, according to a person with direct knowledge of the matter, adding the transaction had been completed but was not yet public.

The completion of the Southampton deal came after the Chinese government effectively blocked a number of deals by refusing to allow domestic companies to remit funds out of the country or to borrow offshore by collateralising domestic assets.  

“There are money pools that are available in Hong Kong and offshore – but at a price – to back up these deals,” said Jarvis, referring to how some companies still managed to close deals while staying compliant with Beijing's rules.

Chinese buyers who had difficulty transferring money for overseas acqusitions could expect to pay interest of 6% to 18% (excluding fees) if they sought funding from sponsors in Hong Kong, according to several Hong Kong-based financial sponsors FinanceAsia spoke to. That would depend on the urgency of the money transfer and the tenor according to the sponsors, who included asset managers.

Great deal, awful timing

The bidding for Southampton was one of the most competitive for any European football asset – perhaps not surprising, given the club's history of profitability, location in a prosperous port town and golden reputation for training major footballing talents including Welsh superstar Gareth Bale, now with Real Madrid. 

But the deal came at the most awkward of times, given China's change in attitude to overseas M&A.

Citic Securities, Shenzhen-based Amer International were among the bidders for the club, which made a £4.9 million net profit in 2016. Lander offered the highest price, according to a person familiar with the situation, and therefore entered into a six-month long exclusivity period with Southampton to close the deal.

“The sell-side advisors thought it would take only six weeks to close it,” said the source, adding “had Southampton known it’s going to take so long, it would probably have picked another bidder”.

There were, however, sound reasons for the delay. Amid an overall tightening of China's approach to overseas investment, sport was one of the few sectors that was regularly called out by name,  both officially by regulators or state media and in “window guidance” circulated among the financial community.

For example, Chinese government mouthpiece CCTV in mid-July reported that some companies’ “irrational” overseas investments were not meant to increase productivity but to shift assets. It even named Suning Holding Group, a top Chinese home appliance maker which bought Inter Milan, a loss-making Italian football club for $312 million in 2016. And in March, the head of the State Administration of Foreign Exchange (Safe) Pan Gongsheng questioned whether Chinese firms were “moving assets overseas under the cover of deals that don’t make sense”.

In Lander’s case, to be fair, there are clear synergies and the excellence of Southampton FC’s youth academy, which developed football stars including Bale, Alex Oxlade-Chamberlain and Adam Lallana, in particular, will help Lander play a bigger role in expanding its influence in the booming football frenzy in China, deal brokers say.

Getting money out of China to fund such a purchase is practically gone as an option; seeking Chinese banks’ financial backing is proving increasingly hard too.

In the tweaked acquisition structure announced in April, Gao decided to change the acquisition vehicle from a domestic entity to an offshore one. And the plan was to use 30% equity financing and 70% acquisition financing from offshore financial institutions, according to the April filing.

It is not immediately clear whether the financing arrangements have changed in closing the deal. A person with direct knowledge of the deal process told FinanceAsia that the deal had used “Gao’s personal wealth out of China” due to the desire to close the deal, but declined to go into details of the financings. The South China Morning Post also made a similar report.

“All the money is settled and paid now,” the person said, adding “all the processes are completely legal and compliant with relevant regulations".

A second source said it was not all Gao’s personal wealth and that there was also offshore financing for the deal.

However, a regulatory obstacle remains if Gao intends to inject the Southampton FC assets into the listed entity, as planned in April. That would require regulatory approval from the NDRC, Ministry of Commerce, Safe, Shenzhen Stock Exchange and China Securities Regulatory Commission (CSRC).

“It really depends on the financials of the business and the CSRC’s views, [which] flip flops all the time, so it’s hard to say in a few years time,” said an M&A banker. “However, to inject an offshore asset into an onshore entity will still in some step involve money being transferred from onshore to offshore, so that is likely to the issue in the current capital control regime."

DealGlobe advised the Gao family, and UBS acted as the sell side advisor. Southwest Securities was listed as Gao’s financial advisor in the April filing but is understood not to have been involved in the deal.

How the deal structure changed

Source: Corporate filing; Click for full view

 

This story has been updated to clarify the financing structure

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