Sunday, 27 July 2014

Massimo and GFH - Deal or No Deal?

The latest uninspired pre-season performance from Leeds, led by a sub-Conference level manager and who seem to remain woefully underprepared for a new season in the Championship is rightly provoking concern and disillusion amongst most Leeds fans. Much has been made of the club's parlous financial position over the past few months and how a period of cost-cutting and re-building is required, something that this writer agreed with in part. As part of this, revealed on the 12th July, it was announced that the club was "close to being debt-free" following a restructure of the original purchase agreement with GFH. To understand this, we need to understand the context of the original deal, the mess Cellino inherited and ultimately what this means going forward.

It’s difficult for GFH to have found a more ideal buyer than Massimo Cellino. the details which have emerged of the agreement struck between Cellino and GFH indicate a quite one-sided deal with sources close to the deal suggesting £11m of equity paid to GFH (part having been paid already with the remainder to follow in December 2014), £10.5m of short term debt believed to be due between 2015-17 in instalments, and a remaining balance of £13.5m of long-term debt believed to be due at promotion. The crucial element of this is that all is to be repaid to "connected parties of GFH". GFH (or its connected parties) will therefore receive a total of £35m for 75% of Leeds United, which values the club at £46.7m. A club with no assets, aside from a captive fanbase and a mediocre squad.

Sources close to the club have indicated that the financial situation post-closing rapidly deteriorated as the scale of some of the costs relating to the club increased rapidly. Rumours of significant increase in running costs would tally with the disclosure that Leeds was operating with losses of £70,000 p/day (£25.6m pa) which would tally with figures which had been indicated by sources close to the club who had been given insights into the financial situation post-closing. This would represent a massive increase compared to the £12m losses recorded as at year end June 2013. Whilst additions were made to the playing squad, there were also departures, and nothing which would suggest a doubling of the wage bill. In addition, revenue should have increased over this period as gate receipts recovered significantly. It would therefore suggest that other non-football related costs increased significantly over the year, costs which don't relate to the rent on Thorp Arch, Elland Road, or the playing squad. Quite a clear indication of the risk of purchasing a football club without any due diligence... buyer beware indeed! The £20m working capital which Cellino set aside for the club was a drop in the ocean given the requirement to stabilise the club over the next couple of years if the continuing operating losses are of the magnitude disclosed.

Flash forward to the restructure with GFH. From what we understand of the agreement, GFH have agreed to halve the debt due with the remainder to be repaid upon promotion. That would suggest that the "long-term" debt remains in place but the short-term debt will be written off.

It is important to be absolutely clear as to what the nature of this debt is. Fundamentally this is money invested by GFH (or connected parties (which in layman's terms is a subsidiary or closely related party of GFH)) during their ownership into the running costs of the club (essentially to cover losses). Whilst it is structured as a liability, anyone with oversight of the true scale of the losses would have ensured that a significant element was written off from day 1. Whilst it is good that Cellino has managed to reduce this obligation, the "triumph" should be balanced with the fact that it was by all indications, a ridiculous deal to begin with, and one which the club (and therefore ultimately the fans) would have been paying for going forward.

Much has been made by Cellino of the need to cut costs, with rumours of wage caps for new players, attempts at reductions for current players, redundancies amongst non-playing staff and also the removal of Brian McDermott followed by the replacement with David Hockaday (a saving of £800k if the rumours are to be believed). A key question has to be whether the cuts are being applied to the right places. As this writer has stated numerous times, the wage bill (which includes players AND the manager) has remained towards the bottom end of the Championship on a wage to turnover basis over the past few years. It therefore seems bizarre to target this element to reduce costs in this context. Ultimately the one element which should not be targeted for reduction is the investment in the squad and arguably the management team. There is a need to redistribute that expenditure to arguably better players but a target of reducing it, in line with appointing an inexperienced lower league manager does not seem to be conducive to success.

It remains to be seen how the next few weeks pan out but it’s clear that there is a long way to go for fans of Leeds United. As a bare minimum, serious re-investment in the squad following the sale of McCormack is still required and the time has surely come to question the wisdom of the Hockaday appointment. English football is not the same as Italian football, as Cellino is coming to realise, and a head coach on the budget he has assigned is highly unlikely going to be good enough for the Championship. Sadly 2 weeks before the start of the championship season, Leeds currently look woefully unprepared to meet the challenge, at a time when most other clubs have already recruited substantially and are putting final preparations together for next season. The chaotic approach to the summer period would suggest we’re in for a long bumpy ride.

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