What Would Exclusivity Mean For Reading’s Future?

Alex explains the lengthy, complicated takeover process the Royals are currently going through.

Well, last week was quite some week for Reading FC. Never a dull moment being a fan! From reports of Bearwood Park training ground being put up for sale, then confirmation of the club being in talks with Wycombe Wanderers, then putting in possibly one of the performances of the season in winning 4-0 against Cambridge United on Saturday, and now reports coming out on Monday that the sale of Bearwood has been put on hold. That’s a lot for any club to go through in a week.

One shining beacon of hope emerged last Friday, through unconfirmed (by the club) reports that the club was close to exclusivity with one party for the sale of Reading FC, as a whole. Nigel Howe then updated fans via BBC Radio Berkshire that there are a few parties in the mix and he is targeting a mid-May sale completion.

This is potentially exciting news for all Royals, but what does this actually mean for Reading FC and how likely will we see the club be sold? I take some time to talk through this, to help us all better understand how excited we should be or whether we should be erring on the side of caution.

First thing’s first: how does someone buy a football club?

Let’s start at the beginning, and quickly get an understanding of how a club gets to this stage and the mechanics of what will have been going on to get this potential point. For starters, the sale of a football club can typically take between three and nine months.

The start of the process is not too dissimilar to selling a house, for example. Albeit for a lot more. The club owner(s), or majority shareholder(s), need to inform the EFL of their intention to sell the club, and effectively make the market aware that the club is available to be sold, as it is largely done on a “word of mouth” basis.

From this point onwards, the club in question will allow a lot of the initial work to be handled by lawyers, who will be expected to receive any of the agents or intermediaries for interested parties and review the proposals against what the owner’s valuation of the club is. It is not always the case that the owner will give an indication of how much they are looking for, in order to sell, though the representatives of the selling club will give an indication of what is deemed an acceptable offer, once received.

Given the complexity and expectation of a large number of parties with a variety of potential proposals, it is common that people will be drafted in to oversee the handling of the process. In this case for Reading FC, that person is Nigel Howe. This intention to make an offer for the club is communicated through a Letter of Intention document, known as an LOI.

From this point onwards, what Howe describes as a “typically eight-week process” begins. Checks need to be completed by lawyers. For starters, they need to confirm that the interested parties actually have the funds to not only buy the club but also be able to finance in the long term too, at least a minimum of 18 months. For this, they will expect proof of financial solvency, as well as proof of identity.

Often, the bidders aren’t involved in this stage of the process and potentially don’t have much knowledge of Reading as a town, given bidders can be from outside of the UK, or indeed football generally.

Lastly, they need to understand how their bids align with what the seller’s expectations are. For example, is it for the full acquisition or partial acquisition, what is available for purchase as part of the football club (for example, the Voco Hotel is not part of it) and what plans do they have to continue to develop the club? If the two don’t align, potential bidders could walk away.

None of this information is made publicly available, most especially the details of the bidders and their proposals. Anyone who enters a bidding process for the acquisition of a football club must sign a Non-Disclosure Agreement, also known as an NDA.

There are a variety of reasons for this, but one of the key factors is to ensure that any discussions are kept private and therefore don’t affect bidders’ decision-making in the process, as they do not know the details of the proposals are being entertained and cannot undermine of bidders by changing their offers to get one over them.

What is exclusivity and what does it mean for Reading FC’s future?

The lawyers and internal leader of the selling process at club level will communicate to bidders a deadline when all proposals must be submitted. This prevents the process going on for too long, helping to protect risk of the value of the asset changing drastically or bidders losing interest.

There is no expiry to how long a period of exclusivity can last but it is typically at least a minimum of 21 days. Though we would want to see things move quickly, I guess it is somewhat reassuring if it takes a little bit of time, as it would indicate all checks are being made thoroughly.

When a period of exclusivity is started, it means the club have identified a preferred bidder or bidders. What it is important to know is that, at this stage, it does not guarantee a sale will happen, or even that a price has been agreed. What it does mean is that the club have identified potential buyers who meet the criteria that they seek, who most likely will have the funds to vindicate the deal.

As mentioned at the start, Howe confirmed that various parties are in the process of getting exclusivity. During this process, because no bid has been accepted, we will not get much information as all parties are still operating under the NDA that is in place. The NDA will stay in place until the purchase is confirmed. Primarily, this is to protect the bidder from copying the homework of the competitors.

From the bidder’s side of things, this period of exclusivity allows them to have a closer look at the club. This includes the infrastructure, facilities and - most importantly - full access to the financial due diligence and accounts for the club. This means they will have a full understanding of what they are buying and how much it will cost them to run the club. This is where we might see the biggest risk for Reading FC, as one can only imagine what kind of a state the club’s accounts must be in right now.

The kind of checks that will be made related to financial due diligence will be the broadcasting, commercial rights and transfer fees for the club - both pending and received, the stadium ownership situation, land registry information and details related to Reading’s financial regulations compliance, and proof of whether Reading have been or are being compliant. Without this, potential new owners could end up footing the bills or being penalised for things that were not dealt with correctly by the previous ownership.

This is why it means that, while entering a period of exclusivity is a positive thing, it is not a guarantee and we still have a long way to go, with a lot of hoops to jump through, to see Reading FC finally get a new owner that we are desperately crying out for.

What happens if the bidders in the period of exclusivity don’t proceed with their offers?

It doesn’t mean the club can’t or won’t be sold. It is a step backwards, sure, and it will mean more time and effort will need to be invested into getting a new owner. However, due to the NDA being in place still and with no agreements being reached, other interested bidders can still negotiate their proposals in the background and step up to the plate.

Howe confirmed that the original “optimistic” target for the sale of the club of around March/April is now looking to be mid-May, so this remains possible to be achieved in a reasonable timeline, as things currently stand.

What happens if the club accept a bid from a party?

It is undoubtably a significant step forwards, but it wouldn’t quite be the time to get the bunting out, as a lot still needs to happen first.

A takeover, formally known as “acquisition of control”, is then subject to both an Owners’ and Directors’ Test (known as OADT), and source and sufficiency funding and future financial information checks, known as FFI by the league board, which in Reading’s case will be the EFL.

The FFI element is essentially an independent review by the EFL that the financial due diligence checks completed by Reading’s lawyers are correct and valid. This would involve reviewing the bidder’s bank accounts, asset statements, trading histories of companies, stock records and other such significant details.

The OADT application is submitted by the club, not by the bidder. The purpose is to ensure that the proposed new owner of Reading FC will protect the integrity, image and reputation of the game.

One does have to wonder how they are able to verify this, given the issues we have seen with Dai Yongge. However, in the most part, it is impossible to know what someone´s true intentions are until after they have run the club for a long period of time.

I personally would like to think that, given all the issues the EFL have seen with Reading, they will work hard to invest extra time and resources into these checks, though this may not be as easy as it all seems from the outside.

There are some factors that can automatically disqualify a potential owner from being able to pass the test. They are:

• Having the proof of financial solvency that demonstrates they can run the club for at least 18 months
• Having the ability to determine or influence the management or administration of another league club or holding more than a 10% stake in such a club
• Being disqualified from serving as a company director
• Having an unspent criminal conviction which carried a 12 month+ prison sentence, or any conviction for dishonesty
• Being a bankruptee or having been involved with a club at the time of an insolvency event
• Being named on the sex offenders’ register
• Being disqualified or suspended by a sports governing body or other professional body
• Having breached the rules on betting in football
• Anyone who is subject to government sanctions
• Someone has committed human rights abuses
• Someone who has any offences involving violence, corruption, fraud, tax evasion or hate crime

As you can see, it would essentially help to shift out some unsuitable characters but doesn’t guarantee that the judgement of character is without flaws.

If the bidder gets through all these checks, what happens next?

It is not clear how long the FFI and OADT checks will take – every deal is different and has varying degrees of complexity. But all going well, a sale can be agreed. In the case of Reading, I think any time before the end of May to allow the summer planning for the new season to be undertaken will be the optimum, which aligns with what Howe is tracking, though the sooner the better to extend contracts for players such as Tyler Bindon and Clinton Mola would be ideal. Whether that’s achievable or realistic though, it remains to be seen.

The deal is confirmed, the money paid, the contracts (of which there are many) are signed, the new deeds signed related to who owns what property and rights to Reading FC, the shareholders and the stock market updated and finally an announcement can be made.

At this stage, there would be no more NDA in place so it can become public information and the new owner can openly discuss the fact they are the owner, and answer questions related to the process. Naturally, I would expect a press conference where the owner would answer questions regarding their plans and intentions for the club, both in the short term and the long term, to help give fans some assurances of stability, growth and development.

Summary

In summary, we have a long way to go yet before the club will change hands. There could be a few more plot twists, there could be more bidders involved, bidders dropping out, changing valuations, changing proposals, due diligence discoveries and all sorts.

And, of course, there is always the risk that Dai Yongge could change his mind or prove difficult to negotiate with. But this is a step in the right direction, and we should remain cautiously optimistic for now.