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?

Conclusion

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.