HOW DO YOU VALUE A FOOTBALL CLUB: EXPERTS DISCUSS THE ODDS: BLADES AWAY

There is an interesting passage in the judgment in UTB LLC v Sheffield United Ltd & Ors [2019] EWHC 2322 (Ch) in relation to experts. It is an interesting example of expert evidence of valuation in a, relatively unusual, case and the court’s view of the respective experts and their contrasting approaches.

THE CASE

The judge considered a number of issues in relation to sale and management of Sheffield United.  The question of the value of the club could have been an issue at the hearing (ultimately it was not). However the judge considered the expert evidence on the value of the club.

THE JUDGMENT ON EXPERTS AND VALUATION OF THE CLUB

  1. The parties prepared and served evidence from expert valuers on the value of the property assets that were subject to the property call options and on the value of the shares of Blades at three different times: about the time that the Call Option Notice was served, in March 2019, shortly before the start of the trial in April 2019, and in June 2019. In the event, after SUFC agreed to exercise the property call options after the start of the trial, it was agreed that it was unnecessary to call the property valuers on the basis that resolution of any disagreement in their evidence had become irrelevant to the issues to be decided at trial. The reports prepared by the property valuers were admitted as written evidence but in the event neither side needed to rely on that evidence in their closing submissions.
  2. I heard oral evidence from the two share valuation experts, Mr Nicholas Good FCA, a partner in KPMG LLP, who was called on behalf of SUL, and Mr Douglas Harmer ACA, a former KPMG employee and now a director of Oakwell Capital Ltd, who was called on behalf of the UTB parties. The evidence of these expert witnesses would have been material had I awarded SUL the relief that it claimed in its Petition, namely an order that SUL buy the shares of UTB in Blades at their current value, or similar relief. However, I have held that the contract of sale and purchase of SUL’s shares in Blades should be enforced and that no relief should be granted on account of unfairly prejudicial conduct alleged by SUL. In those circumstances, the valuation evidence was only of peripheral relevance to my conclusions.
  3. In case it later becomes material, I express briefly below my conclusions on the valuation evidence, in so far as it remained a matter of dispute.
  4. Mr Harmer in his reports had valued Blades and 50% of the shares in Blades at late December 2017, March 2019 and – in a supplementary report – June 2019. The significance of the latter date is of course that by then (but not in March 2019) SUFC had secured promotion to the Premier League. Mr Good similarly addressed the values in late December 2017 and March 2019 in his original report and valued at June 2019 in a supplementary report.
  5. Mr Harmer valued Blades at between £21 million and £25 million in 2017 and Mr Good at between £35 million and £40 million. Mr Harmer valued in March 2019 at £24 million to £29 million and Mr Good at £30 million to £35 million. The current value of Blades with the Club promoted to the Premier League was put in the range of £100 million to £120 million by Mr Harmer and between £88 million and £104 million by Mr Good. Each of the valuers considered that a 50% holding of Blades shares would attract a significant discount from pro rata value, on a sale to a third party, on account of the absence of control over the company.
  6. Mr Harmer and Mr Good were quite different as valuers. Mr Good was an orthodox professional valuer, who had only limited experience of working with football clubs and no particular expertise in the football world, but who relied on colleagues for specialist knowledge. His valuations were rigorous and careful and he impressed me as a highly competent and professional man, appropriately cautious and reasoned in his approach, and aware of the limits to his own knowledge and of the difficulties of valuing a football club. Mr Harmer, on the other hand, was deeply immersed and actively involved in the world of transactions in football clubs and their shares, but was not otherwise an expert in forensic accountancy. His report was thin on reasoning and he was unimpressive as a professional valuer, failing to address and answer properly most of the questions that were put to him. In the final analysis he relied on his gut feel for the right value, based on his experience of the sector and the market.
  7. I was more impressed with the valuations of Mr Good, in particular with his approach to valuing the risk that a newly-promoted club could be relegated within one or two seasons, but I considered that one aspect of his approach was unpersuasive in that regard. This was his partial reliance on betting odds in forming a judgment on the appropriate discount to the value of a well-established Premier League club of the size of SUFC. I consider that a discount of 50%, based on the historic evidence of the fortunes of newly-promoted Premier League clubs, is much more reliable than the bookmakers odds of SUFC specifically being relegated within 2 seasons. Accordingly, I would incline towards the top of Mr Good’s range of £88 million to £104 million, rather than the bottom of it (which resulted from the bookmakers’ odds being converted into a discount).
  8. Mr Harmer’s reasoning, apparently based on a table of multiples of revenue that he considered appropriate to a loss-making business, ultimately did not influence his opinion that the current value of Blades was in the range of £100 million to £120 million. Rather, the multiple that he considered appropriate was derived form his gut feeling that applying the median multiple from his table produced too high a value for the Club, rather than the value being derived from the appropriately selected multiple. I do however have some regard for Mr Harmer’s considerable experience of what is an unusual market. In my judgment his gut feel is of some persuasive value, given his experience, though the range of values that he gives is a broad one.
  9. Mr Harmer expressed the opinion, which I accept, that in the real world a transaction for Blades shares would not have happened in March 2019, because the difference in value between a Championship club and a Premier League club is very great and any seller and buyer would want to know whether or not the Club achieved the promotion in April 2019 that in March it was on course but not certain to achieve. I also accept his opinion that in reality a one-off payment would not be made for a newly-promoted club but that the consideration would be structured so that further tranches became payable if the club survived one, two or more years in the Premier League. Nevertheless, the issues that the valuers were asked to address were the market value of Blades and holdings in Blades on particular dates, which requires one to assess the cash consideration that would be paid in full on the completion date of the transaction.
  10. Having heard both valuers, my conclusion is that the most likely market value of Blades in June 2019 was £104 million, a figure at the top of Mr Good’s range of values but still within Mr Harmer’s range.
  11. Mr Downes QC on behalf of SUL, having successfully undermined in cross-examination the methodology contained in Mr Harmer’s reports, then sought to persuade him that the best evidence of the value of Blades in June 2019 was not his overall gut feel for value but an amount based on the figures for which two other Premier League clubs (with which Mr Harmer is currently involved) are being offered on the market and on the non-binding terms agreed on 1 April 2019 between SUL and ALK for the sale of a majority stake in Blades. Mr Downes also sought to abandon reliance on SUL’s own expert, Mr Good, on the basis that he did not have sufficient knowledge of actual deals being discussed in the market, of which Mr Harmer was aware.
  12. I found these attempts to try to justify the highest possible figure on any available basis unpersuasive. Mr Harmer’s knowledge of the dealings involving the two other Premier League clubs would have been taken into account in the range of values that he expressed in his supplementary report, since the relevant facts were known to him at the time. Further, these were values at which no deal had taken place and, in the case of one of them, no interest had been expressed. ALK’s terms were not binding, involved a number of “kickers” (staged payments) depending on how long the Club remained in the Premier League, and included very substantial sums paid upfront for the property assets, including assets not owned by SUFC or Blades.
  13. If it became material to consider the value of Blades in December 2017 or March 2019, I would accept the opinion of Mr Good as to the appropriate range of values, namely £35 million to £40 million in December 2017 and £30 million to £35 million in March 2019 and would determine a value in the middle of each range. Although it appears odd that the value of Blades – at a time when the Club was close to securing promotion – is lower than the value at a time when promotion was merely speculative, the reason, as Mr Good explained, is that SUFC owned one very valuable player at the earlier time, who was sold at the end of the 2017/18 season for in the region of £12 million in total. With a loss-making Championship club, the value of the club is essentially based on the value of its players and any property assets that it owns. In my judgment, Mr Harmer significantly undervalued Blades in March 2019 at a time when promotion was almost within its grasp because he entirely disregarded that prospect in his valuation approach.
  14. The valuers appear to agree that 50% of the shares in Blades would be worth on the open market only about one-third of the net asset value of Blades. The discount arises because a 50% holding does not carry with it any control over the company’s affairs. The special value attributable to a possible purchase by the other existing shareholder would be disregarded on a valuation on a market value basis, though in reality in many circumstances an existing shareholder would be likely to pay more than the market value.