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.