Cullumgate

PART ONE

The chronology

Towergate founder Peter Cullum (educated at the CNS in Norwich, schoolboy player, life-long fan, business career in insurance) forms the idea of buying Norwich City Football Club plc. In the autumn of 2007 he meets joint owners Delia Smith and Michael Wynn Jones socially, at a game. Some time after that he has business talks with Jones. Cullum outlines an infomal proposal for the company. The talks finish. Cullum makes no formal offer.

On June 30th, 2008, Cullum goes public by way of an interview with the Eastern Daily Press, revealing the fact of the earlier talks, stating his continued interest in buying the club, and holding out the hope of up to £20m for players.

The company publishes its controversial "valuation" amounting to "a minimum of £56m". It is not actually a valuation. If anything the value it puts on the club is £16m (for all the shares at £30 a share), thus setting the price for the club at a fraction over £8m (for 51 per cent of the shares). Nor does it state that the £30 share price is not negotiable, although that might be inferred from the use of "minimum". It should be borne in mind that majority shareholders have a fiduciary duty to look after the interests of minority shareholders, and that any decision to accept less than, say, the £25 paid by many would result in at least a paper loss for those people, and possibly an actual loss.

The "valuation" is more properly a list of potential financial requirements for any would-be owner, based not on someone acquiring new shares but on buying existing shares, and comprises:

Repayment of debt £20m
Purchase of all shares £16m (an unlikely but theoretical possibility)
Separate transfer fund boost £20m

Face-to-face talks are arranged between Cullum and one or more NCFC directors. Cullum again makes no formal offer. There is a joint statement that amicable discussions have ended. [This statement is reproduced in full in the Notes section at the end].

In the autumn of 2008 Cullum writes formally to Smith and Jones stating that he has no plans to make an offer. At the November agm they reveal the contents of this letter and say Keith Harris's company has been hired to find a new owner. There is some confusion over the use by NCFC chief executive Neil Doncaster of the word "investment", causing some fans to think the club is not looking for a new owner but only minority investors. However in January 2009 director Michael Foulger - in denying internet rumours that HE is buying the club - tells the EDP it is up for sale. The explanation is that the club is up for sale (ie, looking for a majority investor) but would presumably accept minority investment as well as or instead of.

Following his "no offer" letter Cullum gives more interviews to the EDP. In a November 26th story he says "he wouldn't just stand by as a spectator" if City were on the financial brink, but he wouldn't "stick a big fat cheque on the table". In a December 31st story he says the credit crunch means he will not after all help out. The EDP says Cullum is continuing to say he would not stand by if the club went into administration but adds:

Mr Cullum said the financial outlook meant he could not put his hand in his pocket to bail out the Canaries.

PART TWO

So what was Cullum proposing?

Neither side has ever published a written version of the outline takeover proposal, so it is not even clear if what Cullum was talking about when he went public was the same plan he had discussed with Jones the autumn before, especially since relegation (which might well have been an original consideration) had by then been avoided. The EDP, in its June 30th story, said Cullum was now offering to put in up to £20m to buy players. It said in the autumn of 2007 he had mooted offering £5m immediately for players to help avoid relegation, and another £15m for the next season (ie, this one).

Nevertheless, putting together all the public comments and newspaper reports and hard financial facts, there is enough common ground to come to the following conclusions.

1. Cullum had no interest in becoming a minority investor. He wanted to take the club over by becoming the majority shareholder. As he said: "I'm not prepared to put that sort of money into the club without having control." After talks broke down in the summer of 2008 the EDP said it understood the £20m was for control, and without that Cullum would not invest a penny.

2. Cullum did not want to buy existing shares but to acquire new shares (potentially putting money into the club). "As I've always said it's not my intention to buy Delia's shares." (EDP interview July 3rd, 2008).

3. However the deal worked, Cullum was not talking about spending more than £20m to acquire the club. That was the only figure he mentioned, as in: "The £20m is an investment that is unlikely to yield a good return other than emotional." So whatever he had to pay for shares would presumably have come out of that £20m. As would however much (if any) of the £20m debt (the amount at the time he went public) he had to repay. If, for example, as the EDP later said it understood was the case, AXA had called in its £12m, the amount available for players would have straight away fallen to £8m. If the Turners had called in their interest-free £2m loan, that also would have come out of the £20m. However Cullum had rejected repayment as an option. "As I've always said it's not my intention...to pay off the club's debts." (EDP interview July 3rd, 2008).

4. There was never any suggestion from Cullum that he would provide long-term funding once he'd bought the club. Indeed he stressed thart he would not. In that June 30th story that started the public saga the EDP reported him saying that he was not going to keep putting more and more money into the club and adding: "I am not an English version of Roman Abramovich."

PART THREE - THE EXPLANATION

Why no offer from Cullum?

The answer to that almost certainly lies not in the purchase price but in the club's main desire for any new owner to be prepared to commit to the long term and to be prepared to run and bankroll the club for several years ahead. Why is that the board's main criterion?

1. Whatever one thinks of football finance (and Norwich City's finances in particular) we are where we are. There is no immediate prospect of the club being able to keep on trading without cash support from whoever the owners are. If anything, the way football economics is going, the need for such injections will become greater. Football eats money.

2. In the 2009 football rich list Delia Smith is placed 89th= on £15m. In terms of owners/supporters there are 14 clubs out of 24 in the Championship above us, with QPR on £15bn, Watford on £1.3bn and Preston on £900m. The nearest are Doncaster and Charlton on £30m. The list may not be complete and the figures to an extent misleading - what matters is the disposable wealth of these owners and how much of that they are willing to invest - but even so they are sobering.

3. Figures vary on how much Smith has put in. She has just estimated it at £11m. Some while ago the EDP put it at £10m. Given that in 2003 her fortune was listed at £20m (and after that she sold her publishing company for an undisclosed but multi-million pound figure and that now she is listed at £15m), £10m-£11m does not look an exaggeration. But whatever the amount, what matters now is not how much she has spent but how much she has left. And football eats money.

4. On September 18th, 2008, Doncaster revealed that the break-even player budget (inclusive of salaries, bonuses, net transfer spending and agents' fees) for this season was £5m but that the budget has been set at double that - later reduced to £8.5m. So a new gap - this time of £3.5m - to be filled so by something - or someone.

5. In the same article he singled out the stumbling block to finding new investors, and in doing so confirmed what was the board's paramount criterion for a new owner. "When the financial facts of life are explained [to would-be owners]...their appetite to write out fat cheques to the club ON AN ONGOING BASIS [my emphasis] seems to dim somewhat."

6. On January 8th, 2009 (and bear in mind this is the legally-trained chief executive/director of a plc making a statement that will be read by shareholders) he wrote the following: "Many people have talked in the media about their wealth, and about their ability and appetite to put money into the club. But, despite so much speculation to the contrary, no one has actually offered to do so. The board have, in the last 12 years, never turned down a single application for shares in Norwich City. Not one."

7. At the Norwich City Independent Supporters' Association forum on March 5th, 2009, Doncaster was asked if the club had ever turned down offers of money. The question was not specifically related to Cullumgate, and Doncaster made it clear his answer was not either. He said: "There's a common perception that there are people who want to put money into this club, which is a perception against all reality. We've never turned down any money that would be in the club's best interests to take."

8. Whatever you think about the competence of Smith and Jones as owners, it is generally accepted even by their detractors that they love the club, and understand its role in the life of the county, and so want to try to guarantee its future. The obvious way to do that. given the increasingly bizarre economics of the sport, is to find a successor capable of providing finance far into the future.

PART FOUR

Cullum's wealth

Cullum was not an independently rich man (certainly in terms of buying football clubs) before he founded his business. His wealth was put by the Sunday Times last year at £1.7bn, but that was essentially his stake in Towergate, which is, like NCFC, an unlisted company. It has shares but these are not traded on a stock market. That means it is not easy to say precisely at any one time what Towergate (and, by extension, Cullum) is worth, and it is Cullum's worth that is relevant, and only his disposable worth that is really relevant. It is only really possible sensibly to value Towergate (and so Cullum) if and when someone buys into the company - or if the company is listed on a stock market.

At the time (the autumn of 2007) of the talks with Michael Wynn Jones, Cullum was reported to own 70 per cent or a bit under of Towergate, although Management Today put the figure at 56 per cent. It may well have been that at the time of those talks that Cullum had hopes of someone buying into Towergate in a big way, and so be in a position to fulfil the long-term funding criterion. The deal of which Cullum may have had hopes was the Candover deal. Which was this.

The Financial Times of February 25th, 2008: "Peter Cullum, the founder and majority owner of Towergate, the insurance group, is in talks to sell a stake of about 25 per cent to Candover, the private equity group, for up to £850m." Assuming he owned 70 per cent of Towergate, that could have put about £595m in his back pocket.

However there was more to the Candover deal than just money. It was widely seen as a precursor to listing Towergate and so paving the way for Cullum not working himself into an early grave but retiring and concentrating on charity work and football (and, yes, it's hard sometimes to see a difference). Time is almost as important a factor here as money.

As the Daily Telegraph stated in 2007: "He is also reported to have said he does not want to remain at Towergate for ever and may step down in the next two years." In other words, a couple of years ago, when he was probably starting to think about owning Norwich City, Cullum was contemplating retiring THIS YEAR. Instead he has a full-time job on his hands safeguarding the livelihoods of 4,600 Towergate employees during a savage - and possibly unprecedented - global crisis. A crisis that people in business and anyone else who had been paying attention had known for a long time was on its way (though not how severe it might be) and whose onset and feared effects had probably already hit Cullum's plans in the following crucial way.

The Candover deal collapsed. April 1st, 2008: "Peter Cullum, the insurance tycoon, has abandoned plans to sell part of his £3bn Towergate business to Candover, the private equity group, The Sunday Telegraph has learned." It added: "People familiar with the talks said last night that they had broken down in recent days over the two sides' projections for Towergate's earnings growth."

As further evidence of the significance of the failure of the Candover deal, Patrick Snowball, formerly of Norwich Union, then left. The Times of June 1st, 2008: "Snowball was brought in by Towergate founder Peter Cullum to lead the insurer to a flotation within two years [ie, this year]. Those plans were scrapped in April after Towergate pulled out of a deal with the private-equity firm Candover at the eleventh hour. A sale of a minority stake to Candover was seen as a prelude to an eventual listing, but the talks ended abruptly."

However in the wake of that failure, Cullum then pulled off a much smaller deal. The Daily Telegraph of April 5th, 2008: "Towergate has confimed insurance entrepreneur Peter Cullum has sold a slice of his company to US hedge fund Och-Ziff - in a deal which will see him and other directors gain £100m." Putting £70m (if the 70 per cent figure was correct) or close to it in Cullum's back pocket.

PART FIVE

Conclusion

So, putting together the chronology and NCFC's finances and hopes and Cullum's wealth. Which is the only way it makes sense.

Cullumgate coincided with a growing economic crisis that changed the art of the possible. When Cullum had his talks with Michael Wynn Jones late in 2007 he may have been hoping to pull off the Candover deal (and so be in a position to buy and bankroll the club and prepare for having a life) but - if so - could not then have guaranteed to do so. And, as it turned out, there was no deal.

When he went public in late June 2008 he had completed the Och-Ziff deal. Giving him enough money to buy the club? That depends. Enough to fund a takeover by way of a one-off payment of up to £20m. Almost certainly. Enough to fund a takeover even if it meant paying off up to £20m of debt and still boosting the transfer fund by £20m? Possibly. But the real question is - enough to fund a takeover AND still provide long-term funding? Whatever the theoretical answer, Cullum effectively answered that in practice when he told the EDP he was no Roman Abramovich willing to go on and on putting in money. Added to which, his prospects of being able to give up time to football, (even as a non-executive owner) had effectively diminished to zero.

On December 31st, 2008 (the day the EDP reported Cullum's "no bail-out" comments) the paper carried an editorial saying it was "clear the powers that be at Carrow Road looked a gift horse in the mouth when they rejected Peter Cullum's overtures at the turn of last year". An echo of the belief of many fans that even if Cullum was not NOW willing to buy the club there had been a time when he might have done, and so should have been allowed to. But that view can only be based on believing that what the club needed was a short-term boost rather than long-term assistance, and an owner for the short-term. Neither of which is, I believe, correct.

The EDP's position seems to be that the directors of a plc should have agreed to a takeover by someone who just a year on (from such a takeover) was saying he could not help bail out the company. It is fair to assume that if Cullum as a fan could not help out, no more could he have helped out as owner.

None of this should be read as criticism of Cullum. As a businessman he looked at buying another company, decided it wasn't for him, and did the sensible thing by walking away. All the evidence points to that being because he was not going to make an offer the board would accept. But that was because events - rather than the directors of NCFC - conspired against him. Anyone who still doubts that should consider the following quote from late last year.

"It's pretty desperate for most of the Championship clubs. The chairmen of each club have to get together to look at salary levels. People talk about the wages of city executives, but maybe it's time to look at the wages of footballers. It is very depressing but there's got be some some fundamental changes to the way things are structured. It seems as though all football clubs are run for the benefit of the players and managers, not the fans. We need an economic reality check. The whole thing is no longer viable."

Do they seem like the words of someone who has gone into takeover talks knowing he is financially in a position to buy a club and then run it far into the future, and has put forward a workable proposal to that effect, and has only been thwarted by intransigent owners putting an absurdly high price on the deal?

Or do they seem like the words of someone who has had a dream of buying the club he loves but has had a crash course in the barking mad world of football economics and decided he is in no position to fulfil that ambition because of the expense of running the club once it has been acquired?

They seem the latter, of course. And they are, of course, the words of Peter Cullum. The man who warned Norwich City fans he would not be willing to go on putting in more and more money. The man who ruled out the very thing he needed to promise.

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NOTES

1. This explanation of Cullumgate is entirely based on information that is publicly available. I only used private sources to confirm what had become apparent from public sources. I have not included any information from private sources that is not publicly available, even though it confirms the explanation. This means some subsidiary aspects of the saga are not covered above, but the essentials are all there. None of what I have been told privately contradicts the explanation.

2. I have not gone into the question of what is Towergate's financial position now, for various reasons. Apart from anything else, since Cullum has stated he has no intention of making an offer, it is not for the moment relevant. If Cullum could in the future resuscitate something like the Candover deal then that might alter the position. However, such a deal might well not be with Candover. As the FT reported on March 14th, 2009: "Candover is considering splitting itself into two, as the crisis-hit private equity group examines all options to avoid collapse."

3. I have not gone into the question of whether Smith and Jones would sell IF they received an offer that satisfied the main criterion. The way to test the idea that they never intend to sell - or only if they get most or all of their money back - is for someone to make such an offer. At that point the question of valuation, over which Cullum said there had been "a friendly arm wrestle", might become more relevant.

4. Whether administration, if it were to happen, would make any difference to anyone's chances of being able to buy the club is probably a question for an accountant or a bankruptcy expert. The real point that would still need to be answered is whether the long-term running costs would be markedly less.

5. The joint statement issued by Cullum and the club on July 14th, 2008, was this:

"Despite the very best efforts of both sides and following a number of amicable discussions Peter Cullum and the directors of Norwich City Football Club plc have been unable to agree a mutually acceptable basis upon which they can meet the stated objectives of Peter Cullum whilst still ensuring compliance with the current legal and contractural obligations of the Club to its stakeholders and delivering a solution that the directors of Norwich City Football Club consider to be in the best interests of the Club and its stakeholders. Accordingly all negotiations have been terminated with immediate effect."