Yahoo Sports Expert explains why Elliott-RedBird loan refinancing works for both parties
The repayment of the vendor loan owed by Gerry Cardinale for the purchase of AC Milan has been a heavily discussed topic recently, and with its extension last week, its time in the limelight may be done, at least for now.
When RedBird, or Cardinale, agreed to buy Milan, they did not pay the full price up front – as is commonly done in large transactions like, but not exclusively, when buying a football club. So Cardinale agreed to pay half of the €1.2 billion (€560 million) then, whilst paying the rest back with an interest rate.
Now, that amount stands at close to €700m, due to the interest on the deal – but this was known before taking the deal and does not affect things in any way, and it was supposed to be paid in the summer.
However, Cardinale and the Elliott Management group agreed to extend the repayment until 2028, giving the businessman longer to seek other investors.
Today, Milan News have relayed the words of Alessandro Giudice, a financial expert, who has offered an explanation on why Gerry Cardinale’s vendor loan payment benefits everyone.
“With the announcement of the refinancing eight months ahead of schedule, RedBird is perhaps hoping to silence the fertile ground of rumours, gossip, and anticipations of recent months. Just a few days ago, rumours had circulated of Cardinale’s imminent disengagement, forced (it was said) by difficulties in finding the money to repay the vendor loan and by supposed negotiating frictions with Elliott.
“The name of the Carlyle fund had also been mentioned as a possible financier, linked to Ibra as a rescuer. A rescue that was clearly unnecessary, in light of Friday’s statement. In order to understand the financial structure on which Milan’s ownership chain rests, it is necessary to go back to 2022, when Elliott decided to exit and RedBird completed the purchase of its entire stake (99.93% of Milan) for 1.16 billion, right in the aftermath of the Scudetto celebration.
“RedBird paid 600 million to Elliott, who financed the rest (560 million) with a vendor loan. The structure is not uncommon in takeovers: the seller replaces a bank, thus facilitating the closing of the transaction.
“In the case of AC Milan, RedBird obtained better conditions from Elliott than it could have obtained on the banking market, starting with the lower rate than those circulating on the takeover banking market. What did Elliott gain from this?
“First of all, the possibility of realising a substantial gain from the investment: almost half a billion in four years, forfeited in the form of cash paid by RedBird and by replacing an equity stake in the portfolio with a vendor loan and thus reducing the riskiness of the exposure.
“Many have likened RedBird’s vendor loan to the financing that Zhang obtained from Oaktree laying the groundwork for his divestment of control of Inter, but these are radically different transactions.
“On the one hand, the (partial) financing of an acquisition in which RedBird nevertheless poured 600 million of its own funds; on the other, a survival loan, aimed at obtaining liquidity for the club’s current operations. Not coincidentally, the rate charged by Oaktree was 12% against the 7% offered by Elliott to Cardinale.
“The prospect of refinancing is also misunderstood by many as a sort of sword of Damocles over the head of the Milan shareholder. However, it is important to bear in mind that a fund does not reason like a private individual, who has to deploy its own resources, the availability of which is questionable.
“The fund collects money from investors and can choose to finance an acquisition with a mix of debt and equity. How is this mix calibrated? According to the ratio that keeps the cost of debt from rising beyond the cost-effective level.
“In the financial structure of companies (private equity funds are no different), debt always has a lower cost than equity on which the fund must provide investors with double-digit returns to compensate them for the riskiness of the investment.
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“For an investor, debt is usually less risky than equity because – unlike equity – debt has to be repaid and grants the creditor the right to reclaim the debtor’s assets. If an acquirer like RedBird can finance a piece of the acquisition with debt (instead of equity), it lowers the cost of the acquisition.
“With the refinancing deal, the US fund will invest another 170 million and reduce the exposure from 560 to 489. The equity in the transaction thus rises to 770 million and the debt ratio will be improved.”
