Wednesday, 3 April 2013

Long-term strategic ownership? A few thoughts on GFH's performance so far...

The question of ownership can often be controversial, especially when linked to something as emotive as a football club. The question of what or whom is a good or bad owner largely comes down to personal opinion and with Leeds and its recent history this is especially so. I personally stand with a foot in both camps. From a pure supporter perspective, the possibility of fan ownership or ownership by a supporters group is immensely attractive, but as a realist, working in the investment industry, I can see that a business such as Leeds United will always attract interest from professional investors.

It is very easy to class one or the other as a "good" or "bad" owner, arguably most football supporters would rightly argue that SISU Capital, owners of Coventry, or the Venkys would represent an example of bad ownership. However, for every SISU/Venky ownership, there is an ADUG, the Abu Dhabi investment consortium that bought Manchester City, or a Fenway Sports Group. In my opinion, there is no reason why an investment firm or consortium with no historical link to the club cannot be a good owner.

And so to the curious case of Leeds United. It is sometimes worth reflecting where Leeds have come from, something which has often been forgotten in recent months. If Leeds United was a patient a year ago, it would have been in intensive care, with the paddles charged and the Grim Reaper standing by the door. Rightly or wrongly, without GFH's or another outside party's intervention and capital during the course of last year, I strongly believe Leeds United would most likely have ended up back in administration. A cashflow dedicated to spurious building projects to the detriment (as critiqued brilliantly by Amitai Winehouse here) of the playing squad, and funded by debt and player sales had left us in a perilous position, and for taking us off the critical list alone, I for one will always be grateful to GFH.

It is one thing however to save a sick person's life, but its another to administer the medicine to cure them. For me, Leeds United as a business has the following issues which need addressing:
  1. Poor cashflow generation: effectively the business isn't creating enough cash to support its activities
  2. A lack of long-term strategic investment: A playing squad which has been chronically underfunded and plundered to support the cashflow rather than invested in.
  3. Lack of engagement with the customer base: A customer base (the supporters) who have become disinterested in the product on offer.
  4. Lack of stability and vision: Lack of clarity in the future of the business and its aims.

For me, GFH seem to have made good steps to address point 1 (which should largely be addressed should the remainder be sorted satisfactorily), to some extent point 3, and in my opinion it is too early to judge their performance against point 2.

In the short-term, it is point 4, a lack of stability and vision which is in danger of seriously damaging the club. For most businesses, It is not necessary for management to explain in detail to its customers how it is expected to move forward over the medium/long-term, however a football club, especially one with a fanbase as engaged as Leeds United, it is crucial.

Leeds United over the past 12 months has been dominated by uncertainty in terms of ownership which has continued under GFH with a variety of contradictory messages, with official statements professing a desire for "long-term" and "strategic" ownership, whilst releases to the stock exchange detail the desire for a short-term exit, and the involvement of investors who look to be keen to make a short-term investment return (see here). The long-term ownership and vision for the strategic direction of the club needs to be clarified and explained to a supporter base who have remained loyal in the face of disinterest for far too long. More importantly, no new manager of a sufficient calibre will be attracted to Leeds United without understanding and buying into the long-term vision of its owners. When said owner has the club as "held for sale" in their books, it does little to suggest a long-term and strategic approach.

Over the medium-term, point 2 in particular needs addressing, and to do so, Leeds United need to have an ownership structure in place with the necessary funds to invest for the long term in the playing squad, to enable the club to challenge effectively in the Championship, but also to attract the calibre of manager required to secure promotion. As can be seen from my earlier blogs, the financial statements released by both GFH and IIB raise concerns over the ability of both businesses to fund the strategic investment required by Leeds to take the club forward. There may be investors standing behind both enterprises willing to fund future investment but this is unclear, and given the high leverage of GFH in particular, one has to be concerned over the long-term viability of their business model. GFH Capital have often said they have a separate funding source to GFH and are therefore independent, however this is contradicted by the fact that Leeds United Holdings is held on the balance sheet of GFH.

Buying and running a business is difficult, buying and running a football club, with the constant attention and interest groups involved is exceptionally so, however I still think that Leeds United deserve a lot better than the status quo. Whilst I will always be grateful to GFH for removing Bates from the equation and for stabilising the business in a period of great uncertainty, I also believe that Leeds requires an ownership understands the history and legacy of the club, is prepared to engage with the fans on a more effective basis, and is able to outline a long-term strategic vision for where they hope to take the club.

Whether this is through a supporter-owned model or whether it is through a professional investment house which understands the nuances of our great club, I am relatively neutral, but it is clear that both financial capital and a vision are required to move us forward, and to ultimately build a successful football club, built on the support of an enfranchised and inspired supporter base. At this stage, it is doubtful to my mind whether GFH have the ability or vision to achieve this.

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