Massimo - Its good to talk....

Leeds' season ended with somewhat of a whimper, however the post-season events have shown that Massimo Cellino has started to establish his regime and the beginning of the cost savings which are required by the club.

We know that the club was running operating losses of ca. £11.5m during the 2012/13 financial year, and sources have suggested to me that these costs increased significantly over the first half of 2014 (notwithstanding any cost increases over the first half of the 2013/14 season). It would therefore seem that the somewhat abrupt and drastic actions undertaken by Cellino have been driven by this circumstance.

Whichever buyer was intending to buy Leeds United would have had to instigate significant cost reductions, with a club operating with operating losses of £11.5m being unsustainable in a post-FFP era. If, as expected, the costs have increased significantly from this position, then it is likely these cuts would have had to be much more extreme.

Corporate restructuring is generally a painful and messy business, not least for the employees affected. It is even more complex when you have multiple stakeholders to deal with, which in the case of a football club is the fans. It is incredibly naïve to assume that the fans of a football club, who whilst not shareholders, are equally engaged in its operation will not have concerns on how it is run. Cellino did in essence pay £35m for a company which has few assets aside from a paying fanbase. It is this element which whilst not necessarily kept happy, does need to be kept relatively informed and in an appropriate way.

A club operating in an information vacuum, with a manager ostracised, players informed via Twitter whether they are being retained or released, and a son of the owner tweeting information (true or false, we shall see) over the internet is not the appropriate way to manage the communications for what is a complex and emotive period, even in the context of the club's recent history. This is one element which needs to be improved significantly by Cellino over the coming weeks, ideally with some clarity as to what the medium-term plan is. It is an information vacuum which allows dis-information to prosper, and ultimately is proving divisive amongst fans. That is not for the benefit of any of us.

The other element is whether these cost elements are being correctly allocated. From an outside perspective, but one with a relative understanding of the financial position, struggles to see whether the limited cost savings (given it is shut for a relatively short time, rent is still due, other staffing costs and utility bills will still have to be paid) outweigh the reputational and operational damage in having players with nowhere to train, utilisation of limited physio facilities at Elland Road and also the view from outside the club, where prospective players (in a season where we need to rebuild) looking at a club which seems to be in turmoil and can't seem to afford its training facility.

Now perhaps this is a completely justifiable move which will lead to substantial benefits, however it does leave me concerned and coupled with the information vacuum, is only seeking to provoke concern amongst much of the fanbase.

Personally, I remain supportive of Cellino's intentions, it is clear he needs to undertake some significant restructuring, and if the elements which have been suggested to me are correct, Leeds are in a significantly bad situation which will require his full support and focus which it would seem he is engaged in providing.

A key element which is lacking is the communication with the staff, players and fans. This is a long-haul project which is likely to take at least 1-2 years in my opinion to turn it around. Cellino is going to have to take the fans with him on this journey and without better communication, I doubt whether he will be able to make this project a success. Communication of the current situation, a medium term plan for stabilising the club, and proactive engagement with the fanbase would go a long way to ensuring that the club unites behind him.

Leeds United – 2012/13 Results - Time for the Italian Job?

“Leeds is potentially a Ferrari, now it’s a Cinquecento. I want to transform Leeds from Highway to Hell to Stairway to Heaven” – Massimo Cellino

The 31^st of March has sadly become a pivotal date in the calendars of most Leeds fans, as we await with trepidation the latest financial results. 31^st March 2014 (or 8^th April by the time Companies House got the accounts uploaded) proved to be no exception.

 The period covered by the 2012/13 accounts cover the final 6 months of the Bates era, and the first 6 months of GFH taking the helm. To refresh the memories of Leeds fans, this was the season where the “Bates Out” campaign really took hold, with average attendances dropping from 23,369 to 21,572 (-7.7%). This led to a drop in match day and other commercial revenue of 12% over the year, a clear indication that fans boycotting Elland Road had a significant impact on the finances. Whilst a drop of 12% in revenue might be a challenge for any business, for a club which had spent a significant amount of time hugging the line between profitability and loss, it became a death grip.

2012/13 saw an overall drop in gross profit of 13%, however also an increase in administration costs of 16%. This had a “double whammy” impact of tripling operating losses from £4.2m to ca. £12.4m. This was partially mitigated by income generated through player sales of £3.9m (predominantly in relation to the sale of Snodgrass). Since 2008, Leeds had managed to cling onto profitability based on player sales. 2012/13 was the first year where this strategy didn’t work as losses started to spiral.

A further indication of the engulfing financial crisis facing Leeds during 2012/13 was the spike in borrowing costs, which increased from zero to £1.3m during the year. This would indicate (and as we knew at the time) that the club was having to borrow increasingly in order to cover its over heads. Financial obligations increased 50% over the year to a total of £34.4m, predominantly due to loans of £15.2m owed to “related parties”, which relates to £11.3m owed to Brendale Holdings Ltd (a GFH subisidiary) and the remainder owed to other “related parties”. £800,000 of the interest paid is in relation to the redemption premium of preference shares owned by Lutonville Holdings as well as a £100,000 administration fee. Lutonville Holdings is a company connected to Outro and by virtue, Ken Bates.

The net conclusion of all this was a net loss of £9.9m. However once you strip out discontinued operations (c. £650k relating to the discontinuation of Yorkshire Radio) and player trading (“one-off” items which aren’t indicative of the true ongoing operating position) you get to a net loss of £11.4m which is a more accurate reflection of the true financial position of the club. This was a substantial increase from the net loss of ca. £540k in 2011/12 and significantly in excess of the limit under the financial fair play regime which will come into force next season which allows losses of £3m and a further equity injection of £5m (a total of £8m).

 

Where do we go from here? Leeds in perspective vs. other Championship clubs, and the task ahead for Cellino

The publication of the accounts was followed swiftly by the publication by Swiss Ramble of the statistics of the other Championship clubs, which can be found on Twitter by following @swissramble or online at http://swissramble.blogspot.co.uk.

 

The 2012/13 results show that Leeds generated the second highest Championship revenue overall. Once you strip out parachute payments, Leeds were actually highest by some considerable margin, with the next highest being Brighton, some 20% behind. It is worth reflecting that this was in a season where Elland Road was dealing with average attendances of 21,572, the lowest average attendance since 2006-07 when we were relegated from the Championship.

With a club generating this much revenue, even in a bad year, why is the club making such substantial losses? The highest cost item for a football club is invariably the wage bill. On an absolute basis, Leeds has the 11^th highest wage bill in the Championship, with the highest being Bolton, followed closely by Blackburn Rovers, Cardiff City and Wolves, a legacy of relegation from the Premiership. This is a resolutely mid-table budget which looks to in contrast to the aspirations of a club who should be fighting for promotion.

What is quite interesting is that Leeds are also behind the likes of Birmingham City, Nottingham Forest and Middlesborough, whilst only being slightly ahead of Crystal Palace and Bristol City, all this for a club generating revenue twice as high as these clubs.

Now it is perfectly reasonable that these other clubs may be taking considerable risks with their finances, something which Leeds are not willing to do, and for the likes of Middlesborough, Nottingham Forest and Bristol City the losses are higher, but not to the extent we would expect for clubs operating higher wage bills with lower commercial revenue (somewhere in the region of £5m higher losses for clubs with a turnover ca. £10-15m lower). In addition, Birmingham and Crystal Palace actually had lower losses or even a profit in Crystal Palace’s case.

This is further underpinned by the wage to turnover ratio, a key metric for the health of most football clubs. Based on this metric, Leeds have the third lowest wage to turnover ratio within the Championship at around 68%. This is well within sustainable levels, and is of a comparable level to that of Watford, Derby County, Peterborough and Blackpool.

Therein lies one of the key issues with Leeds United. How can a club with the highest turnovers in the Championship, operating with a wage budget of that of a mid-table Championship club, still be generating such significant losses? The key element is the “other costs” of the club. Leeds have the highest amount of “other costs” in comparison to other Championship clubs, and almost double in comparison to clubs such as Cardiff City and Leicester City. The growth in this cost element has been phenomenal since 2008.

Leeds’ accounts are notoriously opaque as to what these “Other Costs” are. I have stripped out an amount for rent which I have assumed has grown from £2m in 2008 at 3% p.a.  The question on the lips of all Leeds fans should be, what are these costs, and why have they increased by 210% since 2008, vastly outstripping the growth in wages or turnover?

Ultimately, we don’t know. Press speculation has suggested “exorbitant” legal costs being charged to the club, alongside items such as private jet contracts. It remains to be seen what else could be included in there but what this does suggest is that Leeds has been run with an approach to executive expenditure more akin to that of a FTSE 100 company with a £1bn turnover, than that of a Championship club with a turnover of £30m. It is therefore important for the club to sort this element out, which will rapidly feed through to an improvement in the profitability of the football club.

Cellino therefore faces quite a challenge to improve the profitability of the club. In my view this requires the following steps:

1)      Buyback Elland Road and Thorpe Arch: The sales of Elland Road and Thorpe Arch in 2004 were a necessary evil in order to ensure the survival of the football club at that time. A decade later, and after every owner or potential owner having promised to buy them back, we are still paying an exorbitant level of rent.  To improve the profitability of the club, it is crucial that Cellino becomes the first owner to fulfil this promise.

 

2)      Reduction in overheads: Leeds are the biggest club in the Championship in terms of turnover, and have one of the lowest wage to turnover ratios in the division. Based on this, it is clear that it isn’t the wage bill which is a drag on the club’s profitability. In fact it is the other costs related to the club which are acting as a millstone around it’s neck.

It is of the utmost importance that Cellino gets to grips with the profligacy of previous regimes and cuts this back. I would argue that on a wage to turnover basis, with a club aiming to achieve promotion to the Premier League, the club actually should be showing more ambition, especially given we would expect the turnover to increase over this season (given the average attendance has increased by ca. 25% since these accounts). A well run club should be able to run at a wage to turnover ratio of 70-75%, and I see no reason why Leeds shouldn’t have that as a medium term goal.

3)      Boost turnover: The era of Financial Fair Play will over the medium term, mean that clubs with the biggest turnovers and who are run sustainably, will achieve promotion. Leeds, as the biggest club on a turnover basis by a substantial element should effectively use this to “bully” the other teams in the division. To my mind this doesn’t mean increasing ticket prices, Leeds fans already pay some of the highest prices in the football leagues, but instead it requires the club to maintain the likes of “Leeds for Less”, one of the few positives from the GFH era, which helped to provide a boost to attendance, likely increased expenditure on club merchandise, re-engaged the club with the city after Ken Bates, and introduced a new generation to Leeds.

Subject to getting points 1 & 2 sorted, this to my mind, requires boosting attendances up towards 29,000, which was our attendance in the first year in the Championship. At these levels, and with some resolution to the above points, we should start to be generating some reasonable profits which will undoubtedly feedback through to squad investment and allow us to compete effectively for the best players. This can be seen below:

4)      Squad investment: The immediate output of this needs to be a restructure of the squad over the summer. In order to maintain or increase attendances, Cellino needs to create optimism and boost the performance on the pitch. This will require investment and expenditure on good quality signings. Leeds have had a long history of not investing effectively on the pitch, relying on free signings, older players, and a number of loan signings. Increased squad investment doesn’t necessarily need to result in an increase in the overall wage bill, but certainly a reallocation of resources and a better use of the budget. Cellino and the football management team need to start creating a sustainable squad base for next season, and then a medium term plan for investment. This requires stability and continuity at the heart of the club’s hierarchy.

“Now I’m driving the bus. Now the bus is ours and we have to run the bus.”

GFH inherited a rudderless oil tanker, which this blogger said at the time would require substantial time to turn around and get back on the right track.

 As has become apparent over the past few weeks, the oil tanker is not only rudderless, but also listing heavily to one side. In order for Cellino to turn Leeds into a success, it will require a substantial amount of investment, but also time. We have effectively lost a season under the mis-management of GFH and it is up to Cellino to plan ahead, not only for next season but also over a medium term (3 years in my view) horizon. In the short term this will require investment in the playing squad and in meeting our operational losses, as well as a period of stability off the pitch.

Over the longer term, it will require some expert management, with Cellino bringing his financial management skills from Cagliari (a small but financially well-run club) to Leeds. The excess of previous regimes needs to be pruned, and it is only at that juncture that Leeds will have the sustainable platform to grow and challenge for promotion.

The good news for Cellino? He has inherited one of the largest and most passionate fan bases in the UK. This will ultimately lead to the financial success of the club provided it is nurtured and grown effectively over the coming seasons. This will require more than going for a pint down the Old Peacock with the fans, and time will tell as to whether Cellino has the aptitude and patience to make this work.

“Marciare su insieme?” Time will tell as to whether this will truly be the case and Leeds will finally make the long overdue journey back to our rightful home.

The Way Ahead For Leeds United?

TOMA drags on through another week and most of us are reaching the end of our tether (with the only light relief being the sycophantic comments on Cellino's daughter's Instagram page).

The events of the past 24 hours have narrowed the field somewhat, with Flowers now out of the race and Farnan struggling to get any sort of engagement from GFH. Cellino is therefore striding ahead, and unless something changes markedly, looks set to become owner pending Football League approval (which he is expected to achieve).

As has become more and more apparent, the finances of Leeds United are once again in a parlous state with numerous loans having being made to support the cashflow over the past 9 months. The high interest on these loans will further add to the debt burden that GFH or another party will have to pay off. The need for a sale (given the lack of support from GFH and it's investors) has become ever more pressing and at desperate times come all sorts of characters into the fray.

Step forward Massimo Cellino. We all know about the wider concerns and his history, but instead I want to focus on the challenges ahead should he take over:

- Purchase price: the fact that serious business men, with many years working in football investment can't reach his price would suggest that Cellino has paid a high price to gain control. The out-turn of this is either he takes a more "risk-on" (either being more optimistic than the other parties about performance or being prepared to receive a lower return on his capital) approach, or there has been relatively limited DD conducted and Cellino is insufficiently aware of the challenges facing Leeds. If it is the latter, it will be something we will all pay for going forward (most likely through lack of squad investment).

- Financial Fair Play: as stated here before, the Financial Fair Play regime which comes into force next season will have a huge impact on the way football clubs are run. Focus will shift from owners prepared to bankroll huge losses for a shot at the big time, to those who are able to maximise revenue streams and ultimately deliver profitability. Profitability = more squad investment = promotion. A relatively simple equation. As has been commented here before, I strongly believed that Mike Farnan and his consortium offered the best skillset to achieve this going forward. Given the high probability of Cellino taking over, the question mark in my mind is whether he has the skill set to deliver this, and also deal with the constraints of the FFP regime. A cap of £5m equity being able to be invested next season and £3m thereafter for a club which is losing £11m per annum suggests that it is the expertise and football business management skills which will be most important to turning around the club and delivering long term success, not the person with the fattest chequebook.

- Stability: The fruits of the relative stability of 2013 can be seen by the increased attendances. Not only that, having a manager such as McDermott who has inspired confidence in the squad has helped to maintain and keep happy our key players. A key criterion for success for Leeds United is stability. Something the club as a whole has lacked for the past 13 years. Stability starts at the boardroom and filters down through the management team to the squad and also to the club as a whole. Medium term planning is crucial to stabilise and grow the club and short-term thinking, high squad turnover and managerial changes will not deliver the success we all crave in my opinion. From Cellino's behaviour at Cagliari, and also the shotgun attitude on Friday night, I deeply fear that we are entering another period of instability, which will likely see managerial changes, and with it, the departure in due course of the best members of our squad. This is the anithesis of what is required for promotion.

I still firmly believe the Farnan consortium offers the best probability for success for our football club. If we are however to be bought by Mr Cellino, a few pointers perhaps to be considered:

Stability: The one thing this club needs is stability. Take a moment to consider the work done thus far by Brian McDermott and the sentiment in the wider squad. If you want to be successful in this league you need everyon pulling together and to my mind, that means backing Brian who has had to do a very difficult job with some success in the midst of considerable financial turmoil. You will also win back some of the fans by backing him financially and also offering your long-term support for him. If you want Leeds to be a success, this is the crucial ingredient.

Finances: The club finances are again a mess. In order for Leeds to prosper and grow, someone is going to have to fund the cashflow shortfalls and come up with a credible business plan for stabilising them. Given you have had a successful business career, I would expect you to be able to do this, and articulate it to the fans.

Engagement: You are buying a football club with few assets, aside from players, a Football League Golden Share and a fan base (or the "machine" as Brian McDermott called it). If you want to be a success, you need to nurture and grow the fan base which requires engagement, responsible stewardship and delivering results. Acting as a dictator did not work out for a previous incumbent who managed to alienate a large proportion of the fan base. If you are serious about buying our club, you need to realise where the value truely lies of the asset you're buying and that means recognising the culture and heritage of our great club, being honest and being fair. Events like Friday and Saturday show what happens when you ride roughshod over our interests. The fans were here long before you arrived and we'll be here long after you leave.

Another period of uncertainty in our great club. It is looking like it is up to Mr Cellino as to whether we are able to prosper or return to the dark days of Batesonomics. Only time will tell.

Leeds United - Darkest Before The Dawn?

Takeovers are not meant to be this complicated, yet almost 2 months have passed since the announcement that a share purchase agreement had been completed between Sport Capital (the consortium fronted by David Haigh and including Andrew Flowers) and GFH. The only stumbling block was Football League approval, something which is usually a formality, and Haigh expected completion prior to the transfer window.

Fast forward to late January and there remains no further progress. The Football League approval process has set new records and a crescendo of rumours detailing a shortage of funding for the Sport Capital consortium climaxed today with strong rumours that Haigh was talking to Massimo Cellino, chairman of Cagliari, about joining the consortium. Cellino's son was also later seen tweeting pictures of the Elland Road pitch. Cellino is a controversial character in Italy, someone not unafraid of confrontation, who told all his players that they could leave in December due to the lack of a stadium for the club (Cagliari play their games in Trieste which is over 1,000km away due to a dispute with the council). Cellini was also charged with embezzlement and false representation as part of the rebuilding of Cagliari's stadium early last year.  

The prospect of individuals such as this being involved in the running of our club in the future raises numerous questions, namely what is best for Leeds United in a financial context and more broadly, who is best for Leeds United?

A decade of Batesonomics has left the club on precarious ground. Much like an oil tanker heading towards an iceberg, GFH's work over the past year has started the work of turning the boat away from a collision but much remains still to do, namely considered investment in the playing squad and a requirement to support the ongoing cashflow of the club over the short term. It has become increasingly apparent over the past year that GFH lack the financial muscle to help Leeds get to that next level and therefore further investment is required. In addition, in the new world of Financial Fair Play (FFP), the club which maximises its revenue (ticket sales, merchandise, hospitality etc) will be the one which is able to prosper the most. Leeds United stands out as a sleeping giant in this context, and it will be the ability of a future management team to maximise this which will provide us with the sustainable revenue growth (and ultimately profitability) which will enable Leeds United to deliver the playing squad which will lead to the Premier League.

To my mind, the question is whether Sport Capital can deliver this. The events of the past few weeks, namely the increased publicity, the missing of deadlines and the last minute courting of individuals who quite frankly remind us of a previous owner do not suggest the stability and professionalism required to act as stewards of our club.

Football is unlike any other commercial business. Whilst an individual or company may have financial ownership of a football club, it is the fans who determine its success. In this respect, the owners are more like the board of directors of a publicly listed company, having to remain responsive to the whims and desires of their shareholders (the fans). The Bates approach ignored this, and the consequences were falling attendances, declines in other sources of commercial revenue and ultimately bequeathing an extremely difficult financial legacy to its new owners.

The successful clubs are those which are able to engage and embody the spirit of their fan base. Much of the work done by GFH over the past year has been focussed on this and the change in sentiment has been profound. Where this encounters difficulties are times like these where the goals of an investment bank (and its fiduciary duty to its client to secure the best possible financial return) conflicts with the requirements of a fan base seeking a competent and suitable future owner of the club. The tragedy of Leeds United is that the long term financial mismanagement limits the number of people who are willing to take on a significant degree of risk and invest.

The actions of Cellino throughout his ownership of Cagliari suggests that he is someone who doesn't understand this, and I have significant doubts over the financial backing and ultimately the commercial expertise for the Sport Capital consortium to take us beyond where GFH have got us to so far.

Leeds United require someone with the management expertise to re-awaken the sleeping giant, prepare the club for the FFP era, and perhaps more importantly, embrace and propagate the proud tradition of Leeds United. The rival consortium consisting of Mike Farnan, Gary Verity, Frank Devoy, ex-Leeds United captain Lucas Radebe and allegedly Adam Pearson (ex-commercial director of Leeds United) to my mind offers a compelling mix of individuals who understand the history and ethos of our club, yet also offer the expertise to take on Leeds to the next level. Much remains to be understood about this consortium, but it seemingly makes no sense to maintain exclusivity with a party who are desperately grappling to form a consortium 2 months after having agreed a purchase contract.

GFH need to consider what their legacy will be, persisting with a consortium who could well take us backwards or opening up the prospect of selling to a consortium who may offer a greater prospect of restoring this club.

Time will tell whether we will head back towards the Bates-esque dark ages, or whether in fact it is darkest before the dawn.

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.

Leeds United and FFP - A Long Road Ahead

As another transfer window draws itself to the end, it remains one of mixed results, albeit definitely more positive than previous years. A limited number of players have been signed, but more tellingly, the club have shown a willingness to resist multi-million bids for key players for the first time in recent memory, and what's more, even offer them extended contracts.

It remains clear however that Leeds United continues to be run on a fiscally tight ship. The dream of having multi-million pound investment in the playing squad to enable us to compete effectively at the top of the Championship remains just that, a dream. It is clear that the legacy of the Bates era is still acting as a constriction on investment, which has been compounded by falling attendances last season. 

The Current State of Play - Forecasting 2013

Looking at the 2012 accounts, we can attempt to forecast the likely impact of a drop in revenue in the 2013 accounts. Assuming a benign 5% drop in gate receipts, merchandising and other commercial income over last season, cost of sales remaining and utilising the £2.1m assumed net receipts from transfers (as calculated by Transfermarkt.co.uk which may or may not be correct), we would get to a net loss of £3.25m for last year.

If we run sensitivities around this and look at up to a 30% drop in relevant LUFC commercial income, we have the following net losses being generated:

If we use the percentage drop in attendances as a guide for the decline in revenue (7.7% between 2011/12 and 2012/13 seasons) we get to a net loss of c. £3.9m in 2012/13. Again, this forecast is subject to lots of variables and is likely to be incorrect, but gives an indication as to the likely financial pressures that the club are under. In addition, the restructuring of the post-Bates regime (removal of board members, closure of Yorkshire Radio) will have resulted in short-term costs in order to benefit from long-term gains. GFH as an organisation will have planned for this and been aware of the losses being generated and thus will have planned for funding any shortfalls through equity. It is likely too that things have been worse than expected which may have further impacted on any funds set aside for investing in the squad.

Financial Fair Play - The impact for Leeds United

Another further challenge to football owners is the implementation of Financial Fair Play (FFP). Essentially FFP is being introduced to make football clubs sustainable and stop the ability of owners to run clubs at losses with unsustainable wage bills and large transfer expenditure. The mechanism which has been proposed (and which is already in place, with financial penalties in place from next season) is as follows:

Fair Play Result of either:

 

Nil or greater

 

Or

 

Loss of less than the permitted level of acceptable deviation and shareholder equity investment for the season in question.

 

The "Fair Play Result" is based on pre-tax profit or loss with the exception of:

 

-       Investment in Youth Development

-       Purchase, sale and depreciation of fixed assets excluding players

-       Investment in a club’s community scheme

-       Promotion related bonus payments

 

So essentially, (to break this down into plain English), a club has to have either a profit (net of any expenditure on the items above), or if they make a loss it must be less than the total of a) the allowable shareholder equity investment p.a. and b) the level of acceptable deviation (or loss) which a club is allowed to sustain in a given season. These have been set as follows:

 

2013-14 Season (introduced but no financial penalties for those breaching the rules)

 

Deviation £3m

Equity Investment: £5m

Permitted Allowance: £8m

 

2014/15 Season

 

Deviation: £3m

Equity Investment £3m

Permitted Allowance: £6m

 

2015/16 season and subsequent seasons

 

Deviation: £2m

Equity Investment: £3m

Permitted Allowance: £5m

Looking at this, you can therefore see why GFH are concerned about outlaying considerable expenditure on players for 2 reasons:

• Given the uncertainty over revenue, a need to keep the wage bill under control
• A limit to the amount of equity which can be invested in any year (which given we're running profit shortfalls limits the amount that GFH can invest in the squad in any one year).

The Way Forward

So, given the current situation what is the way forward for the club? The issues we face are:

a) The club is running losses which are unsustainable in the long term.
b) The playing squad is in need of investment in order to give us a fighting chance of promotion

In order to resolve this, the following steps need to occur:

Short-Term

Improvement in matchday revenue and assorted merchandising: A key component of getting the club on the right track financially will be for GFH to improve matchday attendances and therefore boost revenue. The initiatives which have been introduced by GFH should encourage more fans to attend, and encourage expenditure through wider avenues such as merchandising etc. It is also up to the fans to participate and boost attendances too. This will partly be driven by the football team performing on the pitch but it will also depend on getting fans used to attending Elland Road again after the fractious nature of the Bates era.

Reduction in overheads: A further step to achieving this is a reduction in the overheads from the Bates era. Much work has gone into this with the restructuring of some of the club's operations, the closure of Yorkshire Radio and cancellation of private jet contracts (!) but more will have to occur over the next few months. It is clear from looking at our wages to turnover ratio that our wage ratio isn't out of kilter given the size of Leeds, however in the short term it is unlikely to be able to increase much either. Expects constraints on squad expenditure to continue for a while yet. 10 years of mismanagement takes time to correct.

Medium to Longer-Term

Buy back of Elland Road: A key element in improving our profitability is re-taking ownership of Elland Road and saving the c. £1.8m of rent which is payable annually. To put that into context, that is 2 players on £17k p/year!

Sponsorship: One of the main impacts of FFP will be that clubs will need to sweat their assets harder. For most clubs this will inevitably lead to trying to generate more revenue through other angles such as sponsorship. This will increase stadium naming deals, and other forms of sponsorship angles. This is a tricky one and a fine line will have to be struck between some relatively benign stadium naming deal and something much grander (such as the Red Bull sponsorship of Salzburg) which is likely to be much more controversial.

So what would the result of this be, given we're currently looking at losses of c. £4m+ currently? Well, looking at increasing 2012 revenue rather than decreasing it we can see the following results:

So a 30% increase (assuming everything else is straight-lined) in revenue would lead to £4.5m of capital to be invested back into the squad. To put those figures into context, that would result in an increase in average attendances from 21,000 to 28,000.










If this increase coincided with a drop of 20% in overheads (given the restructuring of operations and the potential of buying back Elland Road, something which is achievable over the medium term), this would result in an annual profit of £10.7m.  A sum which would provide plenty of ammunition to invest in the playing squad where necessary.

Conclusion

FFP is likely to have a significant impact on the way football clubs operate, Leeds United included. Reconstructing the club after 10 years of Bates is likely to take time and the only way for us to rebuild financially is to re-attract fans to Elland Road, alongside some corporate restructuring and capitalising on some commercial initiatives where appropriate such as sponsorship. Over the long term, clubs with large fanbases who are able to generate sustainable income growth should be able to compete most effectively with the new era, and the impact of billionaires utilising a club as a symbol of their largesse should be reduced.

The QPRs of this world who assemble £55m squads to compete in the Championship are unlikely to be prevalent as the impact of not achieving promotion and being saddled with large running costs and fines is a bet which almost all owners will be unable to stomach.

The shame for Leeds is that it has taken this long to be in a position to instigate these changes, and more importantly we are now having to rebuild under the constraints of a much more challenging financial era, with FFP virtually rendering the ability of most owners to invest large speculative sums into their clubs as impossible. There's a long road still ahead, and overnight success is doubtful, but over the medium-term, Leeds United should be in a position (with the right management and support of the fanbase) to compete effectively financially at the top of the Championship (and hopefully Premiership) once again.

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.

Conclusion

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.