There’s a missing element in billionaire Jim Ratcliffe’s proposal to buy a majority stake in Manchester United Plc — the “d” word. Rival bidder Sheikh Jassim Bin Hamad J.J. Al Thani pointedly said his takeover offer would be debt-free. Ratcliffe — no stranger to leverage — hasn’t said anything similar. Fans should resist getting worked up.
There’s an almost moral repugnance to the use of financial leverage in the UK. On top, Man Utd fans are already sore that the current owners, the Glazer family, piled debts on the club and took out dividends. But the inconvenient truth is that borrowed money has been key to the success of Ratcliffe’s company, Ineos Group Holdings SA, and the firm is a textbook case of how debt can be the best way to fund an enterprise — so long as the operation has certain characteristics.
To re-cap, Ineos was created with the 1998 purchase of an Antwerp-based chemicals business from London-listed Inspec, a former investment of private equity firm Advent International. Ratcliffe had worked at Advent and was on Inspec’s management team. He led the £84 million ($101 million) buyout of the unit.
More than 20 acquisitions followed in the next decade, with debt as needed. One towered above the rest — the $9 billion purchase of BP Plc’s Innovene petrochemicals business in 2005. The target was around three times larger than its buyer in terms of annual revenue. Ineos levered up to get the deal done: Net debt climbed to 7.9 billion euros ($8.4 billion) from 600 million euros in a year.
The global financial crisis then pushed Ineos to the brink. Rival chemical company LyondellBasel filed for bankruptcy. But Ineos’s lenders took the view that they were more likely to get their money back if they let Ratcliffe and his team get on with the job, agreeing to waive loan covenants. Net debt ended 2009 at a painful seven times profits as measured on earnings before interest, tax, depreciation and amortization. Ineos muddled through.
Further acquisitions and joint ventures have followed, paid for with cash flow and debt. In 2019, Ineos bought the OGC Nice soccer team, and its stable of sports investments includes Swiss club FC Lausanne-Sport and one-third of the Mercedes-AMG Petronas F1 Team. Leverage has stayed under control, averaging around three times Ebitda since the financial crisis and falling below two-times at the end of 2021.
There are takeaways here for both investors and football fans.
Above all, the yarn is another indictment of the UK equity market. It’s hard to imagine that Inspec could have become Ineos as a public company. One driver of the original Antwerp sale was the need to assuage shareholder concerns about the cyclical nature of commodity chemicals. While Inspec’s shares rallied on the sale to Ratcliffe, he was on the better side of the deal. The stock market’s demand for dividends, its aversion to leverage and the likely weakness of the share price in the low ebb of the chemical cycle would have precluded Ratcliffe’s roll-up strategy.
By contrast, debt financing and private ownership are an ideal match for commodity chemicals. Bond investors primarily want their interest and principal payments on time; they can stomach some intervening wobbles. Provided you position your debt maturities so they don’t fall due at a crunch point, debt’s your friend. Plus, Ineos was opportunistic in refinancing its borrowings on highly attractive terms when credit markets reopened after the crisis.
There’s a bit more to it than debt. Ineos targeted unloved divisions inside big oil and chemical companies. Such businesses typically offer easy cost cuts that boost profits and reduce leverage ratios. And, unlike a buyout firm, Ratcliffe hasn’t needed to have a future buyer in mind for each acquisition. The idea is to hold the assets for the long term.
How comfortable — or discomfited — should Man Utd fans feel about all of this?
The financial dynamics of commodity chemicals and a world-class soccer club could not be more different. In the former, you are buying a cash-generative asset that nobody really wants at a price that is typically a very low multiple of profit, with opportunities to reduce expenses. With a trophy asset like a sports club, the opposite is the case. Cash gets sucked up by player wages and transfers. Deal prices are struck at very high multiples of profit. Cost cuts? Good luck. You don’t run a football team like a refinery.
But general financial acumen counts for a lot. Ineos has an enviable financial record, has toughed out crises and has held on to most of what it’s bought for a very long time. These are convincing credentials to be be good steward.
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Chris Hughes is a Bloomberg Opinion columnist covering deals. Previously, he worked for Reuters Breakingviews, the Financial Times and the Independent newspaper.
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