Blue Anorak

Last modified on Monday, 23 April 2007 at 21:09:42

5th March 1999

Dear Shareholder,

Sale and leaseback of Roots Hall and of the training ground and proposed rights issue and placing

I am writing to inform you that earlier this week The Southend United Football Club Limited (the Club) entered into conditional contractual arrangements with a joint venture between Martin Dawn plc and Delancey Southend Limited (the Joint Venture) which will not only allow the Club to repay its substantial commercial borrowings but leave a balance for working capital.

These arrangements (the Transaction) involve:

  • (i) the sale by the Club to the Joint Venture of its freehold title in and the simultaneous grant back to the Club of a leasehold interest in Roots Hall: and
  • (ii) the disposal by the Club to the Joint Venture of its existing lease and the grant of a new lease in respect of the Club's training ground at Eastern Avenue (the Training Ground).

It is the opinion of the board that, if approved and completed, the Transaction will place Southend United Football Club on a sound footing for its regeneration.

Importantly, the arrangements include the following additional advantages for the Club. The Club will have the potential to share in a percentage of any increase in the land value of the Training Ground which may arise as a result of planning permission being obtained. This potential payment will be conditional upon redevelopment or sale of the Training Ground and practical completion of a new football stadium, The Club will also be entitled to share in the development profit on the possible redevelopment of Roots Hall.

A summary of the commercial terms of the Transaction is set out in paragraph 4 below. The contractual documentation is available for inspection by shareholders from today until the date of the EGM between the hours of 9.00am and 5.00 pm on any weekday at the Club's offices. The documentation will also be available for inspection at the EGM. The results of recent professional valuations of Roots Hall and the Training Ground are set out in Schedule l of this document.

I recognise the emotional ties, which the existing ground has for many of you. However, today's transaction should be seen as the start of a new beginning: it will give us an opportunity to reform our finances and the prospect of relocation to a new football stadium with new facilities which will provide additional sources of income.

The purpose of this document is:

  1. To present an unaudited trading statement for the past 16 months. This is set out in Schedule 2 of this document.
  2. To give details of the arrangements by virtue of which:
    • (a) Martin Dawn plc ("Martin Dawn") became the indirect majority shareholder of the Club: and
    • (b) the Training Ground was sold to Martin Dawn and then leased back to the Club in May l998,
  3. To provide details of the ownership structure of the Joint Venture.
  4. To summarise and explain the commercial terms of the Transaction and its benefits to the Club,
  5. To convene an Extraordinary General Meeting (EGM) at which the approval of the shareholders will be sought for the Club to enter into the Transaction.
  6. To inform you of our current proposals for the rights issue of new shares to existing shareholders and the placing of new shares with new shareholders.

1. Unaudited Trading Statement for the past 16 Month Period

As you are fully aware many Football League Clubs, including Southend United, are experiencing very difficult trading conditions.

A major cause of concern has been the continuing escalation of transfer fees and players wages. For the Club, these issues, coinciding with two years of relegation, have had a dramatic impact on its finances leading ultimately to the transaction of earlier this week, Audited figures for the financial year ending July 1998 will be released within the next month or so but the unaudited statements for the period from 1 August 1997 to 30 November 1998 are set out in Schedule 2 of this document. As of 25 February the Club has some £3.87 million of debt and accrued interest. I am sure that this figure is far larger than many of you will have realised. However, you will soon appreciate how these debts have mounted-up if I remind you that for the last two financial years the Club has incurred trading losses at the rate of £500 000 per year.

Of equal concern is the realisation that the market value of the Club's interest in Roots Hall is significantly below the £6.75 million (current use value) at which this asset has been carried forward in the Club's balance sheet for some years. This current use valuation enabled the Club to secure levels of bank borrowing and other lines of credit which it could not afford.

If approved and completed, the Transaction will not only enable the Club to continue to trade but give it the potential to share in the profits which could arise from the development of Roots Hall and from any increase in value of the Training Ground. Consequently, the Transaction will enable the Club to look to the future with some optimism. By contrast, without such a deal the Club will continue to make substantial unsustainable trading losses and run the risk of having both Roots Hall and the Training Ground repossessed.

2. Martin Dawn plc and the Club

On 30 April l998 Mr V T Jobson, the then Chairman of the Club sold his 55% shareholding in the Club to South Eastern Leisure plc (SEL) (a company previously wholly owned by him and his associates) and simultaneously Martin Dawn acquired a 50% shareholding in SEL. On 12 May 1998 the Club entered into a sale and leaseback transaction with Martin Dawn by virtue of which it sold its existing lease of the Training Ground to Martin Dawn in return for £525 000 cash and simultaneously took a new 25 year lease of the Training Ground at an annual rent of £72 000 per annum. Subsequently, Mr Ronald Martin and Mr Geoffrey King became directors of SEL (Mr Martin as chairman) and Geoffrey King and myself joined the Board of the Club.

It soon became clear that the Club's cash flow projections were proving far too optimistic and an urgent injection of extra Finance was needed. Following discussions between Martin Dawn and Mr Jobson. Mr Jobson confirmed he was not prepared to inject any more money into the Club and discussions commenced between both parties for Martin Dawn to buy from Mr Jobson his 50% interest in SEL. The sale of the SEL shares, was concluded in November l998. As majority shareholder Martin Dawn was then in a position to arrange additional funding for the Club,

3. The Joint Venture

The Transaction will involve a joint venture compromising a new company, Mailtrace Limited (Mailtrace), and its new wholly-owned subsidiary. Roots Hall Limited (RHL). Mailtrace is currently l00% owned by Martin Dawn but will, immediately following completion of the Transaction, be 50% owned by Martin Dawn and 50% owned by Delancey Southend Limited (formerly Blunglen Limited) (Delancey).

Mailtrace will acquire the headlease of the Training Ground from Martin Dawn, accept an assignment or surrender of the Club's existing Training Ground lease and enter into the new lease arrangements with the Club as summarised below, RHL will enter into the sale and leaseback of Roots Hall as summarised below.

In November 1998 Delancey, having already advanced substantial funds to the Club (through either Martin Dawn or SEL), replaced virtually all of the Club's commercial borrowings and effectively became the Club's banker. As security for these borrowings, Delancey has a charge over the assets of the Club (including Roots Hall and the Training Ground lease). The Club is currently in default in respect of payments of capital and interest to Delancey and in respect of lease payments to Martin Dawn in respect of the Training Ground.

4. Summary of the Commercial Terms of the Transaction and its Benefits to the Club

The Transaction which the Club entered into earlier this week can be summarised as follows:

Roots Hall Ground

  • a. Roots Hall will be sold to RHL for a consideration of £4 million.
  • b. RHL will grant a four year lease of Roots Hall (without any statutory security of tenure) to the Club at a rental of £400 000 per year but with a twelve-month rent free period from the date of completion (effective value £400 000).
  • c. The Club will benefit from a 30% share of any development profit realised on the redevelopment or disposal of Roots Hall after allowing for RHL's priority profit share of 25% per annum compound In respect of its direct investment but after taking into account rent paid by the Club. The club's profit share is capped at £l 500 000.
  • d. If during the term of the lease. RHL wishes to dispose of Roots Hall, the Club will have a right of first refusal to repurchase Roots Hall for a price equivalent to that offered by a third party at arms length.
  • e. The Club will receive the sum of £250 000 payable on vacation of Roots Hall.
  • f. Conditional upon the Club receiving an additional £250 000 on or before 3l December 1999 by way of a valid offer to its shareholders for additional shares in the capital of the Club on a pre-emptive basis, RHL will pay to the Club an additional £250 000.

The Training Ground

  • g. The Club will surrender its existing Training Ground lease to Mailtrace in return for a payment of £500 000.
  • h. Mailtrace will grant to the Club a new four year lease of the Training Ground (without any statutory security of tenure) at an annual rental of £102 500 but with a six-month rent free period from the date of completion (effective value £5l 250).
  • i. Mailtrace will have the right to determine the new Training Ground lease upon 6 months prior notice following the grant of outline planning permission for substantial re-development of the Training Ground.
  • j. Mailtrace will pay the Club the sum of £250 000 upon its vacation of the Training Ground following determination of the new lease.
  • k. The Club will benefit from a 30% share (with no cap) of any increased land value of the Training Ground. Such share to be payable only once the Training Ground has either been redeveloped or sold and a certificate of practical completion has been issued in respect of a new football stadium for the Club.

Events on which the Transaction is Conditional

The Transaction is conditional upon and will not proceed unless the following conditions are satisfied (or where appropriate waived) either by the specified date or 21 April 1999 whichever is the later:

  1. RHL receiving satisfactory results from the environmental tests, searches and enquiries which it has arranged to be carried out on Roots Hall and, to the extent that such results indicate the need for remedial work, such remedial work not costing more than £300 000.
  2. The landlord of the Training Ground, Southend-on-Sea Borough Council, consenting:
    • (a) to the transfer of the existing Training Ground lease from Martin Dawn to Mailtrace; and
    • (b) the grant of the new Training Ground lease by Mailtrace to the club.
  3. The assignment by Martin Dawn to Mailtrace of the existing Training ground lease and associated option agreements.
  4. The Transaction being approved by the shareholders (representing 50% of the votes cast) of both SEL and Martin Dawn by 21 March 1999,
  5. The Transaction being approved by shareholders of the Club (representing 50% of the votes cast) at the EGM on 24 March 1999 (see Part 5 below).

Benefits for the Club

The total consideration which the Club will receive will therefore be as follows:

Sale of Roots Hall Ground4 000 000
Payment on vacation250 000
Surrender of Training Ground lease500 000
Payment on vacation250 000
Total5 000 000

At completion the Club will receive a total of £4.5 million (£4 million from the sale of Roots Hall and £500 000 from the disposal of the Training Ground lease) and will need to repay its indebtedness to Delancey Martin Dawn and SEL which as at 25 February l999 was £3.87 million (debt and accrued interest) but will increase between now and completion. The balance after expenses will be available to the Club as working capital. The Club will be entitled to a vacation fee of £250 000 when it vacates the Training Ground and to the other vacation fee also of £250 000 when it vacates Roots Hall.

The Club also has the benefit of rent-free periods on both properties, namely twelve months at Roots Hall and six months at the Training Ground, plus of course the potential development profits. Against this we will have to pay the rent on Roots Hall as from the development Spring of the year 2000 and the rent on the Training Ground as from Autumn 1999.

However, we will no longer be carrying the heavy burden of interest charges on borrowings and finance lease payments which for the 97/98 financial year totalled £229 483 (over a full 12 months they would exceed £430 000)

5. Proposed Extraordinary General Meeting

The vote at the EGM is required because the Transaction is with a connected party that connected party being Mr R Martin who is a director of SEL, Martin Dawn, Mailtrace and RHL and has (through his substantial shareholding in Martin Dawn) a substantial interest in the Club.

Shareholders who together hold more than 50% of the Club's share capital have already irrevocably undertaken to vote in favour of the Transaction. This includes SEL ( which controls 55% of the total vote) and all the current director shareholders (who account for 11.4% of the total vote).

The purpose of the EGM is therefore for me to explain the Transaction to all of you who are able to attend with the hope of obtaining your resounding endorsement for this opportunity for Southend United Football Club to restore its financial health and benefit from the proposed new facilities.

The directors of the Club (other than Mr King and myself) have approved the Transaction as being in the best interests of the Club, Board approval was unanimous (except for Mr. Woodcock who was unable to attend the meeting due to ill health). Mr King and I abstained from voting because of our indirect interests in the Joint Venture (through our shareholdings in Martin Dawn), The board now recommends the Transaction to shareholders.

6. Proposed Rights Issue and Placing

Following completion of the Transaction it is the intention of the directors to invite existing shareholders to subscribe for additional shares in the Club by way of a pre-emptive rights issue and to arrange a placing of shares to new shareholders. It is expected that the terms of these share issues will be announced within the next few months.

Apart from the financial benefits which these additional share issues will bring to the Club, the placing of shares with new shareholders will give the many supporters who have, in the past, shown a desire to own shares in their Football Club, the opportunity to do so. This will, I believe, further strengthen the relationship between the Club and its supporters.

The Club is hoping to raise at least £250 000 from the pre-emptive rights issue on or before 31 December 1999 so as to qualify for the additional payment of £250 000 from RHL referred to at 4(f) above.

What to do next

Enclosed is a Form of Proxy for use by holders of ordinary shares at the forthcoming EGM. Any such holders are requested to complete the Form of Proxy in accordance with the instructions printed thereon, and return it to Roots Hall, Victoria Avenue, Southend-on-Sea, SS2 6NQ so as to be received not later than 7.30 pm on Monday 22 March 1999. The return of the completed Form of Proxy will not prevent holders of ordinary shares from attending and voting at the meeting in person should they so wish.

I and my fellow Directors look forward to seeing you at the EGM.

Yours faithfully

John Main
CHAIRMAN


© Luke Bosman Monday, 23 April 2007 at 21:09:42

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