Hollingworth writes that “to be a [Sports Direct] shareholder in 2019 is to be someone who supports Mike Ashley and takes a longer-term view.”

One encounter that could have been illustrative for Sports Direct shareholders was Ashley’s dealings with institutional investors in the US private placement market over a decade ago, when he bought Newcastle United, a football club in the North East of England, to its former owner, Sir Jean Hall.

The quick acquisition resulted in a rocky deal with private placement investors who, unbeknownst to Ashley, owned the football club’s debt securities and invoked an option to buy out under a covenant. change of control, forcing Ashley to pay them around £47million. in less than three months, which he had not anticipated when he bought the club.

Mike Ashley’s Sports Direct has had a tough few weeks. The British company further delayed the publication of its results last Friday – following a tax bill of 670 million euros demanded by the Belgian authorities – while simultaneously announcing that its chief financial officer Jon Kempster will leave the company in September. Grant Thornton, his auditor since 2007, resigned on Monday.

Poor financial results, particularly at Sports Direct’s sports retail division, prompted shareholder Hollingworth to write to Ashley asking her to “resource parts of the business of [his] properly”, arguing that they help to avoid “unnecessary crises.

Hollingworth referred to Tim Martin, the founder and chairman of the JD Wetherspoon pub chain, as someone “extremely involved in running the business, but [who] has built a good corporate team that helps him both run the business better and handle the vast majority of investor interactions in a constructive and helpful way.”

These concerns about Ashley’s business strategy are similar to those of a group of institutional investors, who dealt with him when he acquired Newcastle United just over a decade earlier.

Several private debt players have declared GlobalCapital that Ashley, when acquired from Newcastle United in 2007, avoided the due diligence opportunity to buy the club quickly, completing the deal in just under three days. But Ashley was unaware that Newcastle had private placement debt which, after a change in control, could be sold back to the club.

It took just three days in 2007 for Hall to sell his 41.6% stake in Newcastle United to Ashley, one of Britain’s most flamboyant businessmen. Hall, who had been the football club’s majority shareholder since 1992, had been trying to sell his stake for some years.

Hall had traveled across Europe looking for a buyer for several years, but none could be found.

That was until 2007, when he received a call from an agent in London, who said he had found a buyer for his stake at £1 a share, which was the amount Hall wanted. Hall traveled to London for what he thought were preliminary meetings with the buyer, who turned out to be Ashley.

Hall arrived at Ashley’s solicitors’ office in central London, and her team wanted to sign the deal on the spot, according to Hall. He said he asked Ashley to do her due diligence.

Ashley replied, “We don’t want to do due diligence, we want to get the deal done,” Hall said. ChronicleLive, a Newcastle local news site.

Hall, who hadn’t even packed a duffel bag, stayed in London for three days and the deal was done, putting Ashley on her way to owning the club in full.

But Newcastle United, who declined to comment for this story, also had an outstanding debt. The club’s accounts showed that it had issued £55m of senior notes with a fixed interest rate of 7.43% in 1999 through a special purpose vehicle called St James’ Park Finance, to fund a extension of 15,000 seats to St James Park, its stadium.

The debt was secured by future revenue from ticket sales and corporate hospitality receipts and was to be repaid in annual installments from 2000 to 2016. According to several bankers and private investors, these tickets were sold to a group of American private investors, among them large institutions like M&G and, according to a PP agent, MetLife.

Newcastle weren’t the only ones to enter the PP market at this time.

English football clubs became popular with American PP investors in the 1990s and early 2000s. Teams like Leicester City, Norwich City and Leeds United, as well as later Arsenal and Manchester United, followed suits. North American sports teams in the National Basketball Association and the National Football League in the market for long-term loans at lower interest rates than they would. be billed elsewhere.

The NBA itself, both through its parent company and subsidiary Hardwood Funding, has raised US private placements. The NFL also has outstanding PPs in the name of the parent organization and various fundraising vehicles.

“They [UK football clubs] were all the rage in the early 2000s,” said one PP investor. “But many PP investors, including myself, underestimated the risk of relegation [from the division they play in that] UK clubs work – and that’s where the problems started.

Leicester City, for example, received £38m through an American private placement sold to the North American university pension fund TIAA-CREF in the early 2000s for the construction of its stadium, then called Walkers Stadium.

However, the year before the East Midlands side started playing Walkers, they were relegated from the Premier League. Due to the loss of revenue from television money and stadium debts, the club temporarily went into administration and ownership of the stadium passed to TIAA-CREF.

“If a Premier League team is relegated to the Championship [English football’s second tier, to which the bottom three Premier League teams descend at the end of each season]the football club is suffering massively,” he added, pointing to Leeds as a particularly painful example.

Leeds United, one of the top clubs in English football from the 1970s to the 1990s, reached the semi-finals of Europe’s premier club competition, the UEFA Champions League, in the 2000-01 season. But after spending big and failing to qualify for the same competition in 2002-03, the club dropped out of the Premier League in 2003-04. The club were unable to repay their debts and went into administration in May 2007. They have not featured in the Premier League since.

Investors in his PP also performed poorly. “Leeds’ recovery was in the double digits in percentage terms, but it was a weak recovery,” the PP investor said.

It was in that fateful month of May 2007 that Hall sold his shares to Ashley, prompting Ashley’s financing vehicle, St James’ Holding, to make a cash offer for all remaining Newcastle United shares. The total was valued at £131m.

But the change in ownership has presented Newcastle United’s PP investors with a chance to exit an investment that Leeds United believe could have a big downside. By exercising their change of control option, they could sell their debt back to the club and be reimbursed.

A netting clause means that the borrower, if it redeems the debt or recalls it before maturity, pays investors according to an agreed formula to compensate them for the coupon payments they would otherwise miss.

“Almost all PP issues will have a change of control definition that if the owner moves on, you can offer the notes [back to the issuer] au pair or do everything,” said a US PP agent. “It protects private placement investors from deteriorating credit, and with Ashley taking over and the industry falling, it was certainly the route investors needed to exit.”

According to a person familiar with the situation, when Ashley heard about the offset option and the private placement investors’ intention to exercise it, he was glowing.

“Newcastle’s then chief financial officer conveyed the message from Mike Ashley that private placement holders ‘can get screwed’,” a source familiar with the matter said. “It’s safe to say they didn’t all hold hands and sing Kumbaya.”

Another source with knowledge of the situation said the fact of the change in ownership was not the only reason investors postponed the investment. “It was a pretty toxic industry no matter who came in,” one investor said. “There was clearly institutional pressure on the side of investors to get out of the business – that’s the main reason why investors invoked the clause.”

In September 2007, Newcastle United were forced to repay £42.725 million to institutional investors, plus 10% compensation of £4.273 million, making a total of around £47 million.

Ashley, in his first public statement after the Newcastle acquisition, noted that there was a lot more debt than he had expected, but said: “There was no time to make the usual due diligence on the deal because I had to act so quickly so I paid £140m for the club with the expectation that there was a £70m debt. , it was around £100m, so there was suddenly an extra £30m to be found big boy and I didn’t cry.

In some ways, this is a unique story in the private placement market, and one that is unlikely to be repeated. But it has stuck in the minds of many PP investors and, 12 years on, continues to fuel skepticism of UK football clubs as issuers of private debt.

Mike Ashley’s public relations agency, Keith Bishop Associates, did not respond to comments. Sports Direct did not respond for comment.