Wednesday, 18 December 2013

Takeover - The Sequel

It looks like Leeds United are again on the brink of another takeover, this time to a consortium led by Chief Executive David Haigh and rumoured to include Andrew Flowers, CEO and founder of Enterprise Insurance.

The Haigh consortium are rumoured to be acquiring a 75% stake in the club which would see GFH retain a “significant stake” and Noorruddin remain involved in the club. A second takeover has been on the cards since GFH acquired Leeds in December last year, however a proposed sale fell through during the first half of the year, and since then (and Bates’ departure from the club) much work has centred around stabilising the operations of the club and also re-engaging with a disenfranchised fan base. This work has started to bear fruit with average attendances up 18% from 21,572 last season to 25,511 this season. Whilst it is unclear as to whether the merchandising and other commercial revenue has seen a similar impact, it bodes well for the future financial performance of the club.  In addition to this, the reduction in overheads undertaken over the summer should help to reduce the financial burden on a club with one of the lowest wage to turnover ratios in the division.

The Consortium

Details as to the make-up of the consortium at this stage are quite sketchy. As has been reported, Andrew Flowers has been detailed as one of the investors, which has coincided with a proposed sale of a stake in Enterprise Insurance (his Gibraltar-based UK insurance company). Flowers is the founder and significant shareholder in Enterprise, however his actual stake in Enterprise and net worth outside of this is unknown. A 2009 bond issue prospectus details a trust controlled by the Flowers family as having a 50% interest in the controlling company, with a further entity (Rhone Holdings Ltd) retaining the remainder. Its unclear as to whether Andrew Flowers was behind both entities and the holding structure seems to have changed since then.  Enterprise as a whole is valued at £100m, but it appears that only a stake is mooted to be sold, therefore how much of any value generated by this will be injected into the Leeds deal by Flowers is unclear.

The Elland Road Millstone

The sale of Elland Road in 2004 to Jacob Adler for £8m during the midst of our financial meltdown was a particularly hard blow for fans, and the subsequent rental payments (now totalling £1.4m p.a. with annual increases of 3% p.a.) have continued to put a strain on the cashflow of the club. One of the (many) perplexing aspects of the Bates era was the lack of initiative to buy back Elland Road for the £15m option price, especially when countless sums were spent on renovation and redevelopment of various aspects of the ground. Much of this was grounded in the somewhat naive belief that the club would be able to boost its revenue stream significantly by improving the overall customer “experience”. As such, an estimated £11m has been spent on rent since the ground was sold. Sources close to the Haigh consortium have indicated that buying back the ground will be their “top priority” which is good news for fans and for the future financial performance of the club, albeit cynics will note that each of the previous takeovers (Bates and GFH) have included similar promises. The difference this time is perhaps that the Haigh consortium will be going into this from an unrivalled position in terms of in-depth knowledge of the club’s true financial position (something which it is likely that GFH struggled to ascertain even with an extended due diligence period) and which would therefore suggest offers a strong possibility of occurring.

The benefits of owning Elland Road once again are significant. The removal of rental payments should result in a direct improvement in the profitability of the club. Under the terms of the lease, the club will be responsible for all repairs and maintenance of the club anyway and therefore these are costs which are paid for as part of the operations of the club. This should therefore give the capacity to boost the wage budget going forward (£1.4m equates to £26,000 per week which is not an insignificant sum in the Championship).

Transfer Pot – Return of the prodigal son?

In addition to the proposed buyback of Elland Road, it has been suggested that Brian will be provided with substantial funds to improve the squad in January (finally an alleged transfer “pot” worthy of the name). As part of this, Max Gradel has emerged as a transfer target and initial discussions are rumoured to have taken place with St Etienne. Again, cynics will recall the same drama last January which came to nought and also featured the sale of Luciano Becchio. Whether a player returning to an old club is a good move is also an important consideration, however I would hope that the club are relying on McDermott’s judgement as to whether it is suitable, and his comments yesterday were quite encouraging.

As per previous transfer windows, I will believe the squad investment when I see it, however any purchaser of Leeds United must realise that the squad is one area which has consistently been underinvested in. Further to this, the introduction of Financial Fair Play financial penalties next season would offer the consortium the opportunity to invest equity into the club for the improvement of the squad before this is restricted as per the beginning of next season. Some focussed and specific investment in a few key positions could provide the club with the impetus to build on a promising start this season and mount a sustained challenge for promotion.

Conclusion – A Wishlist

As Christmas approaches, it seems appropriate to detail a Christmas wishlist for the new consortium. Leeds fans are a long-suffering bunch but we must hope that 2014 will finally bring wealth, prosperity (and maybe success?):

-          Clarity of ownership: A decade of offshore vehichles, trusts, murky ownerships in far-flung places have been disconcerting to the fan base.  I would hope that the consortium will provide greater clarity as to its composition and intentions going forward.

-          Buyback of Elland Road: The buyback of Elland Road, both for financial but also for more emotional reasons must be high on the list of all Leeds fans. Elland Road is our home, and the improvement in cashflow from the removal of rental payments will be of considerable benefit.

-          Squad investment: A decade of our best players being sold, patched up with free transfers (with the occasional gem emerging) has been a hard cross to bear. Focussed investment is required to push us into the midst of the promotion race.

-          Back Brian: McDermott has been a revelation since joining the club, and has managed what must have been a turbulent few months quite gracefully. The stability he exudes at the heart of the club has allowed us to keep performing this season after what must have been a relatively disappointing summer. Keeping him on board and at the heart of the club is crucial.

-          Keep up GFH’s work: Much has been made of GFH’s PR machine, the motivation of an overseas investment bank looking to generate a profit, and the mixed messages from the club over the past few months with various talk of investment, players (Gradel) re-signing etc. However the work done to re-engage the fanbase with the club, the hard work done at improving the operational costs in the club must be appreciated. Personally, I am convinced that Leeds would have entered administration last year without their intervention and their contribution over the past 12 months must be seen in a very positive light. It is important that the work begun by them is continued.

Let’s see what the next few weeks bring, I for one am hoping for a very prosperous 2014.

Sunday, 1 September 2013

Leeds United and FFP - A Long Road Ahead

As another transfer window draws itself to the end, it remains one of mixed results, albeit definitely more positive than previous years. A limited number of players have been signed, but more tellingly, the club have shown a willingness to resist multi-million bids for key players for the first time in recent memory, and what's more, even offer them extended contracts.

It remains clear however that Leeds United continues to be run on a fiscally tight ship. The dream of having multi-million pound investment in the playing squad to enable us to compete effectively at the top of the Championship remains just that, a dream. It is clear that the legacy of the Bates era is still acting as a constriction on investment, which has been compounded by falling attendances last season. 

The Current State of Play - Forecasting 2013

Looking at the 2012 accounts, we can attempt to forecast the likely impact of a drop in revenue in the 2013 accounts. Assuming a benign 5% drop in gate receipts, merchandising and other commercial income over last season, cost of sales remaining and utilising the £2.1m assumed net receipts from transfers (as calculated by which may or may not be correct), we would get to a net loss of £3.25m for last year.

If we run sensitivities around this and look at up to a 30% drop in relevant LUFC commercial income, we have the following net losses being generated:

If we use the percentage drop in attendances as a guide for the decline in revenue (7.7% between 2011/12 and 2012/13 seasons) we get to a net loss of c. £3.9m in 2012/13. Again, this forecast is subject to lots of variables and is likely to be incorrect, but gives an indication as to the likely financial pressures that the club are under. In addition, the restructuring of the post-Bates regime (removal of board members, closure of Yorkshire Radio) will have resulted in short-term costs in order to benefit from long-term gains. GFH as an organisation will have planned for this and been aware of the losses being generated and thus will have planned for funding any shortfalls through equity. It is likely too that things have been worse than expected which may have further impacted on any funds set aside for investing in the squad.

Financial Fair Play - The impact for Leeds United

Another further challenge to football owners is the implementation of Financial Fair Play (FFP). Essentially FFP is being introduced to make football clubs sustainable and stop the ability of owners to run clubs at losses with unsustainable wage bills and large transfer expenditure. The mechanism which has been proposed (and which is already in place, with financial penalties in place from next season) is as follows:

Fair Play Result of either:
Nil or greater
Loss of less than the permitted level of acceptable deviation and shareholder equity investment for the season in question.
The "Fair Play Result" is based on pre-tax profit or loss with the exception of:
-       Investment in Youth Development
-       Purchase, sale and depreciation of fixed assets excluding players
-       Investment in a club’s community scheme
-       Promotion related bonus payments
So essentially, (to break this down into plain English), a club has to have either a profit (net of any expenditure on the items above), or if they make a loss it must be less than the total of a) the allowable shareholder equity investment p.a. and b) the level of acceptable deviation (or loss) which a club is allowed to sustain in a given season. These have been set as follows:
2013-14 Season (introduced but no financial penalties for those breaching the rules)
Deviation £3m
Equity Investment: £5m
Permitted Allowance: £8m
2014/15 Season
Deviation: £3m
Equity Investment £3m
Permitted Allowance: £6m
2015/16 season and subsequent seasons
Deviation: £2m
Equity Investment: £3m
Permitted Allowance: £5m

Looking at this, you can therefore see why GFH are concerned about outlaying considerable expenditure on players for 2 reasons:
  • Given the uncertainty over revenue, a need to keep the wage bill under control
  • A limit to the amount of equity which can be invested in any year (which given we're running profit shortfalls limits the amount that GFH can invest in the squad in any one year).

The Way Forward

So, given the current situation what is the way forward for the club? The issues we face are:

a) The club is running losses which are unsustainable in the long term.
b) The playing squad is in need of investment in order to give us a fighting chance of promotion

In order to resolve this, the following steps need to occur:


Improvement in matchday revenue and assorted merchandising: A key component of getting the club on the right track financially will be for GFH to improve matchday attendances and therefore boost revenue. The initiatives which have been introduced by GFH should encourage more fans to attend, and encourage expenditure through wider avenues such as merchandising etc. It is also up to the fans to participate and boost attendances too. This will partly be driven by the football team performing on the pitch but it will also depend on getting fans used to attending Elland Road again after the fractious nature of the Bates era.

Reduction in overheads: A further step to achieving this is a reduction in the overheads from the Bates era. Much work has gone into this with the restructuring of some of the club's operations, the closure of Yorkshire Radio and cancellation of private jet contracts (!) but more will have to occur over the next few months. It is clear from looking at our wages to turnover ratio that our wage ratio isn't out of kilter given the size of Leeds, however in the short term it is unlikely to be able to increase much either. Expects constraints on squad expenditure to continue for a while yet. 10 years of mismanagement takes time to correct.

Medium to Longer-Term

Buy back of Elland Road: A key element in improving our profitability is re-taking ownership of Elland Road and saving the c. £1.8m of rent which is payable annually. To put that into context, that is 2 players on £17k p/year!

Sponsorship: One of the main impacts of FFP will be that clubs will need to sweat their assets harder. For most clubs this will inevitably lead to trying to generate more revenue through other angles such as sponsorship. This will increase stadium naming deals, and other forms of sponsorship angles. This is a tricky one and a fine line will have to be struck between some relatively benign stadium naming deal and something much grander (such as the Red Bull sponsorship of Salzburg) which is likely to be much more controversial.

So what would the result of this be, given we're currently looking at losses of c. £4m+ currently? Well, looking at increasing 2012 revenue rather than decreasing it we can see the following results:

So a 30% increase (assuming everything else is straight-lined) in revenue would lead to £4.5m of capital to be invested back into the squad. To put those figures into context, that would result in an increase in average attendances from 21,000 to 28,000.

If this increase coincided with a drop of 20% in overheads (given the restructuring of operations and the potential of buying back Elland Road, something which is achievable over the medium term), this would result in an annual profit of £10.7m.  A sum which would provide plenty of ammunition to invest in the playing squad where necessary.


FFP is likely to have a significant impact on the way football clubs operate, Leeds United included. Reconstructing the club after 10 years of Bates is likely to take time and the only way for us to rebuild financially is to re-attract fans to Elland Road, alongside some corporate restructuring and capitalising on some commercial initiatives where appropriate such as sponsorship. Over the long term, clubs with large fanbases who are able to generate sustainable income growth should be able to compete most effectively with the new era, and the impact of billionaires utilising a club as a symbol of their largesse should be reduced.

The QPRs of this world who assemble £55m squads to compete in the Championship are unlikely to be prevalent as the impact of not achieving promotion and being saddled with large running costs and fines is a bet which almost all owners will be unable to stomach.

The shame for Leeds is that it has taken this long to be in a position to instigate these changes, and more importantly we are now having to rebuild under the constraints of a much more challenging financial era, with FFP virtually rendering the ability of most owners to invest large speculative sums into their clubs as impossible. There's a long road still ahead, and overnight success is doubtful, but over the medium-term, Leeds United should be in a position (with the right management and support of the fanbase) to compete effectively financially at the top of the Championship (and hopefully Premiership) once again.

Friday, 16 August 2013

And then there were 4 (at least): The ownership of Leeds United

Another week, and the confusion over the ownership of Leeds United continues. As pointed out here upon the release of GFH’s financial results, the ownership structure had changed, with GFH now owning a minority stake. Following the release of the accounts, the ownership structure disappeared and then reappeared on the website 24 hours later. The revised ownership of Leeds United is stated as follows:

Leeds United Football Club Limited ('LUFC') the company that holds the share in the Football League, is a member of the West Riding County Football Association and a Full Member of the Football Association.

LUFC is a wholly owned subsidiary of Leeds City Holdings Limited ('LCH').

LCH is wholly owned by LUFC Holding Limited ('LUH') a company based in Grand Cayman.

LUH is managed by GFH Capital ('GFHC') on behalf of its investors.

The shareholders in LUH that hold over 10% are: -

i.    GFHC
ii.   International Investment Bank
iii.  Envest Limited

GFHC is a wholly owned subsidiary of Gulf Finance House, BSC.

Envest Limited is owned by Mr and Mrs Salah Nooruddin.

Our ownership is therefore derived as follows:


So what does this mean for Leeds United Fans:

Do GFH still own the majority of Leeds United?

In a word, no. GFH is now a minority owner of Leeds United, but as was subsequently clarified, they do control a majority stake.

GFH is a private equity fund management business. Their business model is to raise equity from clients and invest it in projects. Their income stream is:

·         Profit on successful investments from their own capital

·         Fees charged to clients in managing their capital

·         Promote or effectively a bonus for achieving a profit in excess of a target return

GFH will therefore raise a consortium of investors around a project, invest that capital and execute a business plan. Typically these clients will be passive investors, with GFH retaining de facto control over all business decisions, hence GFH’s reference to being in majority control.
A synopsis of GFH’s business model can be found here.

Is this the large investment talked about and do we have more cash to invest?

In my opinion, no. From the messages trailed by GFH and other parties, it is likely that these investors came into this relatively early. It is likely that this restructuring was completed in the summer after Bates had left in order to “clean up” the investment structure.

This hasn’t led to further investment (just see McDermott’s spending power!) and any capital is likely to be diverted to funding the cashflow of a club which is still struggling with the excesses of the Bates era. It is likely that any further investment will see a further reduction in GFH’s stake and given this is still “held for sale” on the bank’s balance sheet, I could see this happening over the short to medium term, with GFH remaining in control and charging investors fees. Typically PE fund managers only have small stakes in deals and profit from fees and the promote (or bonus) from outperformance. Expect this sell-down to continue.

Will this reduce transparency?

Given the size of Leeds City Holdings (and subsidiaries), there will remain a requirement for the companies to file detailed accounts which are public knowledge (and which I, plus many others will be following in close detail). Given the Bates-era legacy issues, I would also expect to see GFH highlighting the financial performance to provide fans with clarity as to the issues they’re facing.


The reorganisation has little practical impact but does provide markers to the future ownership structure. Taking large stakes in companies is generally not practical for private equity investors. It is too capital intensive. I would therefore expect more investors to be introduced over the coming months with GFH diluted down further.

Does this concern me? No, GFH will likely remain in day to day control, managing the club on behalf of others. To date they have proven to be adept at identifying the issues with the club and seeking to resolve them. It is important for fans to remember however that even for all the PR spiel, GFH will be focussed on securing the most profitable exit for their clients. Whilst this should be aligned with the aspirations of the fans, this might not always be the case.  

Wednesday, 7 August 2013

GFH - Q2 2013 Results and more ownership questions...

GFH released their 1st Half Year 2013 results today, and as ever for Leeds fans, and those with a slight interest in the comings and goings of our parent company, it posed a great deal of questions, particularly over our opaque ownership.

Hisham Al Rayes, acting CEO of GFH, had the following to say:

"We continue to focus on the strengthening of the balance sheet and the realignment of projects for successful exits, which is allowing us today to establish the Bank's credit rating in the market. We believe that this will also further enhance market confidence in the bank and allow for better business making in the future."

He added: "Furthermore, during the quarter we focused on building platforms to extract value from our existing assets. In this regard, we secured a number of strategic investors alongside GFH in Leeds United FC.

"We also saw progress on a number of our development projects and expect to see positive results later this year in particular in Bahrain and Tunis... We are confident that a stronger future is ahead and are determined to deliver higher returns for our investors and shareholders as we go forward."

First to the financial performance, looking at the income statement for H1 2013, we can see that there was a decrease in underlying profit compared to the same period in 2012 (pre-ownership of Leeds). Profit from operations was $4.9m vs. $5.7m which was largely driven by a decrease in "Other Income" of $12.2m.

Other Income is primarily a buy back of financing liabilities, recovery of expenses and of impaired facilities, therefore items which aren't related to the principal operations of the company. If we strip this out, the underlying income (predominantly from management fees) has actually increased significantly over the period, with management fees up from $1.6m to $5.2m.

The cashflow paints a slightly more challenging picture. If we strip out the proceeds from issues of convertible murabaha (essentially debt) and proceeds from treasury shares (equity raised), there was a cashflow shortfall of $20m over H1 2013. This is nothing new for GFH which has continued to suffer from cash burn at quite an alarming rate. They have always been able to refinance their liabilities, however it does raise questions as to  how the company could support itself if creditors/investors stopped providing financing to GFH.

The most interesting aspect of the accounts relates to the reduction in assets held-for-sale. As stated in the 2012 accounts:

"The Group has an active plan to sell its stake in LUFC Holdings Limited, and accordingly, the asset and liabilities acquired were classified as held-for-sale and presented in the consolidated statement of financial position. Subsequent to the year end, the Group has commenced negotiations relating to the sale of its stake in LUFC Holdings Limited."

This resulted in a net total of assets held for sale of $45.5m. Looking at the H1 2013 balance sheet we can see that assets held for sale has actually decreased to $22.2m. Whilst small stakes in Leeds City Holdings Limited (LCHL) had been disposed of (see previous blog posts on IIBB), it doesn't account for such a significant reduction in ownership. Turning to note 11 of the accounts, GFH state that:

"During the period, based on placement of majority stake in LUFC to strategic investors, the Group de-consolidated LUFC Holdings Company."

Whilst it had been GFH's stated aim to reduce its holding in Leeds United to a minority stake in the short to medium-term, it had been thought that any sale had not been completed. Looking at this there are 2 scenarios:

  • GFH has sold a majority stake to a single investor
  • GFH has sold down a majority stake to a fund which it manages and which has numerous investors

The lack of announcements from GFH but the mention of strategic investors, would suggest to me that the latter was more accurate. This also fits in with GFH's business model as detailed here,

This would de-consolidate LCHL's accounts from GFH's (a nightmare from an accounting perspective), and formalise the investment structure. It could also suggest that the spike in management fees in H1 2013 related to the arrival of new investors (previous reports such as this article detail how GFH's business model relies on charging investors a "premium" in order to invest in projects).

So what does this all mean for Leeds fans? Well, the following:

  • It would suggest that GFH have achieved their goal of selling down a majority stake to investors, and deconsolidating their balance sheet from that of LCHL's.
  • The previously contradictory messages of long-term, sustainable ownership and holding the asset for sale can be understood a bit better. GFH as fund manager, and minority holder, will look to maximise value, and hold for the medium term (unless of course they receive an offer for an early exit at a reasonable profit).
  • If it is a standard private equity fund structure, GFH as General Partner (GP) will have overall control for managing the fund and will decide and execute strategy at largely their own discretion. The other investors (or Limited Partners) will have little/no control over the strategy, and therefore one would hope that incidents such as investors' nephews being forced on our youth squad should not be something to worry about in future.
  • Financially, unless we have further investment, it is likely that we will continue to work on a tight budget, hence the trailed messages on 2-3 year promotion horizons and "sustainable investment". The promotion of Leeds United will rely on the financial support of its fan base, and GFH managing to reduce the profligacy of the Ken Bates era, essentially "bread and butter" private equity (reduce overheads and increase turnover).
The start made over the past few months has been promising, and what is reassuring is that GFH have realised that having a united and content fan base is the only way to ensure the financial success of Leeds United. Having started this year as relatively pessimistic, I am certainly more confident as to where the club is going. Time will tell as to whether GFH can deliver on their well-polished rhetoric.

Sunday, 12 May 2013

Q1 2013: IIBB, GFH and the curious partial sale of Leeds United

We are now through our first full financial quarter of GFH's ownership. The first quarter of 2013 has been quite active with GFH selling a stake to IIBB, a fellow Bahraini investment bank. Now with the first publication of both GFH and IIBB's results we can see how this purchase/sale has been reported by both institutions and how it has changed the ownership structure. A few things are worth noting which I detail below:

Value of the investment in Leeds United

As can be seen, in US$ terms, the value of Leeds United fell by $3.2m over the quarter. However, this fall was driven by currency movements rather than any depreciation in the value of the investment. The value of a 10% stake (roughly £2.8m) is broadly in line with the £2.5m which IIBB state that they have paid for their stake.

Nature of Investment

Now this might get a bit technical, but here we go. Typically, an investment would be structured like this:

This would have the following benefits:
  • The investment is ring-fenced from the rest of the group
  • It provides an easy structure for investors to be able to acquire a stake
  • A new investor gets "clean" exposure to the performance of Leeds United rather than if a stake is acquired through GFH for example.

Comments in the IIBB accounts suggest that their stake is held indirectly through an investment in GFH. GFH also control 100% of the company and it is fully consolidated on their balance sheet, therefore suggesting that the structure is something like this:

Now, for an investment bank to hold an investment in this structure is quite odd for a lot of reasons.

  1. Any investment is exposed to GFH's financial performance, at least indirectly.
  2. Who controls the exit from the investment? If GFH own 100% of Leeds United, it would suggest that any other investors are effectively dependent on GFH to decide when the exit is.
  3. An investment structure as per the above would be a difficult structure for most investors to get comfortable with, unless they could get very comfortable with the GFH business model. This could limit the potential pool of future investors and perhaps ties in with comments from the IIBB annual report about GFH targeting other "regional players" as investment partners.

IIBB's annual report also provided a few more comments on their strategy for this investment: 

"IIB anticipates capital appreciation over the medium-term, therefore we are currently taking the approach to hold the 10% investment in its portfolio, with a consideration to offer it once the club’s financial position is solidified."

To me, this sounds relatively short-term, and would suggest that IIBB would look to exit as and when an appropriate offer was tabled. Much work is to be done in stabilising the club's financial position still (see my previous blog), but with the building work complete and the final season of season ticket forward sales to Ticketus now upon us, one would hope that with some recovery in attendances, the cashflow of Leeds United should improve over the short-term. This would suggest that IIBB's ownership is not likely to being long-term.

Timing of investment

My final point relates to the timing of the investment. The inclusion of the investment in the IIBB 2012 annual report; comments that IIBB were introduced to the investment in December 2012 and as mentioned in previous blogs, the positive revaluation of the investment in the FY2012 GFH accounts, would suggest strongly to me that the sale of 10% of Leeds United actually occurred in December 2012 before the year end rather than at the time of the announcement at the end of March. If this was true, why then was this announcement delayed by 3 months?


The continuing theme of an opaque ownership structure of Leeds United continues, and the strategy for sourcing further investment is open to question as is the assertion that any investment is for the "long-term" when you have a co-investor stating that it will look to exit once the club's financial position is "solidified". In my opinion, the acquisition by IIBB muddies the waters and I see a majority sale over the short to medium term as the most logical step forward.

Time will tell however, and a lot more will become clearer over the early part of the summer and the club's attitude to backing McDermott's strategy, alongside the retention of key personnel such as Byram. If Byram for one is to be sold for a significant sum (which may occur), then whether these funds are then re-invested into the squad is an important metric as to how GFH will be judged as owner of Leeds United. As has been seen in my previous blog, there has been a pattern over the past 5 years of excess transfer profits being diverted to fund ancillary projects rather than being reinvested in the squad. A break from this negative feedback loop would be a positive step forward, that said, I would much prefer Byram to stay.

Tuesday, 7 May 2013

The Mythology of Ken Bates - Leeds United 2008-12

The Oxford English Dictionary defines a myth as:

A widely held but false belief or idea:
·         an exaggerated or idealized conception of a person or thing

One of the largest myths in association with Leeds United concerns the argument that Ken Bates has created a “well run” football club. A cursory glance at the accounts indicates that this is far from the case.

Stepping back to the original takeover, it can be argued that at that critical juncture there was no one else with neither the will nor ability to step in and take over Leeds. Maybe so, but that doesn’t explain the chronic misallocation of capital away from what should be the primary objective of a football club, the playing squad.

My analysis has focussed on the accounts from the period 2008-2012. 2008 coincided with the exit of Leeds from the latest period of administration, a deduction of 15 points and effectively a business facing a new start. Bates’ consortium had taken control of the club following a payment to shareholders of 11.2p in the pound and whilst numerous creditors lost out, Leeds was effectively debt-free. On that basis, and with the highest turnover of any club in the lower leagues, then Leeds should have been ideally placed to grow from a sustainable base. What therefore happened? One of the main parts of the Bates mythology surrounds his assertion that he established a well-run football club. A simple analysis of the cashflow, the starting basis for whether a business is in a healthy state or not suggests otherwise:


As can be seen above, the cashflow of Leeds was largely supported by player sales throughout the post-2008 era, with the exception of 2011 where the net outflow was £1.25m on player transfers. If we look at the entire period, income from player sales contributed £8.4m to Leeds United’s cashflow over the period, and as can be seen from above, this has played a crucial role in keeping Leeds United operating as a viable concern over the period.

Construction Costs

Looking at the cashflow, a total of £18.6m was spent over the 5 years on alterations and fixtures/fittings, which we can see is related to the improvements made to Elland Road (this ties in broadly with the £20m that Bates said had been invested in Elland Road in the Daily Mail article in December). To put this amount into context, the total amount of cashflow generated from operating activities by the club, plus the player sales over the 5 year period totals £19.25m. This is quite astonishing, and for a business whose primary revenue generator isn’t real estate (especially one which doesn’t actually own the real estate it is investing) it is the equivalent of betting the house on black.

Now, there are two reasons why investing this amount may have been necessary/desirable:

1.       Elland Road was unsuitable to host Championship football: Whilst Elland Road may have been requiring modernisation in an ideal world, this wasn’t something that was strictly required. If there had been some legislative or structural requirement to improve the stadium, then under most circumstances this would be the responsibility of our landlord (whoever they may be...).

2.       The investment would produce an attractive and sustainable return which can be reinvested in the playing squad: Given the cost of investing such a large amount involved diverting funds and weakening the playing squad, one would expect that the business would have to receive a substantial return over a short timeframe in order for this to justify the outlay.

To my mind, neither point is valid in this case and certainly not to the detriment of investment in the playing squad. £18.6m which could have been invested in the playing squad was instead diverted to a spurious building project which has done little to enhance the bottom line of the business and by diverting funds at crucial points over the past 5 years, may have prevented Leeds United securing promotion at an earlier stage. This is further proved when looking at the growth in turnover components over the period. For this I have excluded central distributions and TV income which are largely outside of the control of the football club business and instead focussed on gate receipts, merchandise revenue and other commercial revenue. If we assume that corporate hospitality falls into other commercial revenue which is its most logical location, we can see that it has broadly flatlined over the period;

What therefore was the justification for investing a huge component of the cashflow for what looks like quite meagre returns to date?

Administrative Expenses

Another component which stands out when looking through the accounts is the amount of administrative expenses. As can be seen below, whilst wage growth has been relatively constrained, and I have assumed that rent has grown by 3% per year from a base of £2m (as per Swiss Ramble’s blog:, the growth in other costs has been huge, growing from £5.5m to a total of £10.6m, in effect doubling. It is hard to see what significant other costs would be due to be paid by a club which has outsourced its catering services and does pose some questions. As ever, given the lack of clarity in the accounts it is very hard to see where the costs have been accrued.


Given the comments during the Levi case where Harvey referenced the huge legal costs that the club had incurred, one can only presume that a significant component of the other costs must relate to some of these legal costs.

Wage growth has remained constrained throughout the period, as can be seen from the chart below:

Leeds have consistently kept the ratio of wages/turnover between 49-56% over the 5 year period which, as Swiss Ramble stated in his blog, puts Leeds at the bottom of the pile compared to other Championship clubs. Whilst sustainability is obviously important (as we have seen over our recent history) it does suggest that there is room for further investment in wages to be made, especially if there can be some cost control of some of the other costs within the business.



"We are one of the most stable clubs in the country, we will not take any risks, and we will not spend money that we haven`t got in the hope that we will go up." – Ken Bates 28/12/11

Looking at the 2008-12 period and Bates’ claim of building a “well-run club”, one which takes no risks and doesn’t spend money it doesn’t have doesn’t quite stack up. For a start, investing the vast majority of the operating cashflow of the business whilst also funding the remainder by selling the only valuable assets of the business (the playing squad) to fund an investment which to date has failed to produce any form of reasonable return for the outlay strikes me as the exact opposite of not taking risks.

When the cashflow started to run out in 2011/12, Bates had to rely on raising capital by forward-selling income from season tickets and taking loans from other spurious sources. Forward-selling season ticket income it should be remembered was exactly the strategy that got Leeds into trouble during the Ridsdale era, an era Bates likes to refer to as an example of bad management.

Ultimately 2008-12 represents an opportunity missed. Had the operating cashflows been invested sustainably in the playing squad, had the club taken a more active approach in keeping some of the promising League One squad together by perhaps increasing its wage/turnover ratio and reducing some of the other costs, then the dream of Premier League status could have been realised. Instead we have shiny new corporate facilities, another season of mid-table Championship football and a club which has a significant amount of its future cashflow sold onto other companies. Turning around a troubled business is like turning around an oil tanker and therefore GFH or whichever other party becomes involved with Leeds over the near future will require time and investment to do this. Ultimately the rhetoric and mythology that Bates has sought to create belies the reality of a club which has gone backwards rather than forwards over the past 5 years.