GFH and IIB - Long-Term Strategic Investment?

Last week saw GFH achieve the sale of a 10% stake in Leeds United Holdings Ltd to International Investment Bank (IIB), a Bahrain-based investment bank. David Haigh's comments at the time were as follows:

"The introduction of IIB is in keeping with what have always been GFH Capital's aims for the successful, sustainable and long term ownership of Leeds United FC.
"We believe that a consortium of like-minded investors provides the best ownership model for a club which belongs among the elite of English football clubs and global sporting brands.
"It is our aim to provide the finance and the stability to enable the club to complete that journey as soon as possible."

I'm going to come back to that statement in a minute, but first a brief look at IIB and their business activities. IIB was incorporated in 2003, and its core business areas are Real Estate, Private Equity and Structured Products. From looking through the portfolio of investments, the bulk seem to be real estate deals throughout Europe and the Middle East, with the private equity transactions predominantly confined to the Middle East.

David Haigh's comments above would indicate that IIB's investment in Leeds will be "long-term", "sustainable" and will provide the "finance and stability" to take the club forward. With particular focus on the "finance and stability" element, are IIB in a position to deliver this?  Looking at the Q4 2012 accounts (http://www.iib-bahrain.com/pdf/EnglishQ42012.pdf) provides some insight into the firm's financial stability and potentially also the ability to finance further investment in Leeds United.

Income Statement

If you strip out "gain on conversion of associate to investment at fair value through equity" (effectively a non-cash revaluation), we get to an operating loss of -$967,000 for 2012, an improvement on 2011's operating loss of -$2,565,000 but a loss nonetheless. Effectively we have a business whose core revenue (Investment Banking Fees) does not cover its Corporate and General and Administrative Expenses. This would indicate a business which is struggling to generate a profit through its core activities. Again however, it must be stated that this is an improvement from the position in 2011.

Balance Sheet
The balance sheet of IIB is in solid shape with limited debt putting pressure on the capital structure. It is unclear as to how their investments ($58.6m in total) are valued and whether this is hiding any losses, particularly on the real estate side.

Cashflow
For me the most troubling aspect of the business is their cashflow which shows a net cash decrease of $25,929,000 over the course of 2012 with a current cash balance of c. $35.5m. This is largely linked to investments made, but as can be seen from the income statement, the business is not generating cash and therefore its sustainability is down to support from outside sources (either investors through equity or debt).

This may be readily available, but it does raise a question mark over their ability to continue to sustain investment in their transactions and does to my mind create questions in terms of their ability to provide "finance and stability" to Leeds United.

With Warnock's comments indicating that GFH need to sell shares in order to fund investment in the club, and Haigh's comments above, this may be the first of many share sales in Leeds United. With the outcome of any proposed investment by Steve Parkin at the time of writing this uncertain, what would the implications of having a consortium with multiple investors, invested in Leeds United?

From personal experience, investment consortiums can be incredibly tricky to maintain and manage for anything but a medium term investment horizon and must generally be governed by a firm legal framework and stringent business plan.

For a business such as Leeds United, which requires investment and stabilisation, not to mention having to deal with the vagaries of the performance of a football team (whose performance can to a reasonable extent be governed by chance), it can be difficult to maintain a cohesive vision amongst all parties, especially when some/all of these parties who are investment banks and therefore might have different investment targets, hold periods and ability to fund further investment on an ongoing basis. As a Leeds fan, any attempt to stitch together a consortium of multiple parties of a similar ilk would particularly worry me, especially when it is unclear in terms of their ability to provide long-term sustainable investment into the club.

To my mind, the following is clear:

1. Leeds United today is a club for sale and one which requires further investment. This breeds uncertainty and will make it difficult to attract both the manager or players required to mount a successful promotion bid.
2. GFH need to sell down their stake (either fully or partially) over the short to medium term.
3. Given how this season has turned out, and the need to attract a new manager with a proven track record to replace Neil Warnock, a sustainable consortium/pool of investors will need to be in place before the end of the season in order to maximise the opportunity of next season.

I still retain some faith that GFH will take the necessary steps to ensure that the club is put on a sustainable footing, and that much of the work they have done to date has improved things compared to the Bates era, however the uncertainty over the club's ownership is unsustainable with the investment of IIB doing little to improve the status quo. The longer it is allowed to drag on, the more damage will be done to our prospects for next season and even from GFH's perspective, this is surely untenable.