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.

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