LUST - Leeds United - Financial Analysis 2012
LUST 13/9/12
Further to comments from Ken Bates that the club “will continue to be run along proper lines,” we have undertaken a review of the financial situation at Leeds United. Following on from the latest cash analysis last week, the report below is based upon the views of independent football expert Rob Wilson and our own finance experts. The subjects covered are by no means exhaustive, but help to highlight the overall state of the financial situation at the club.
2011 Audited Accounts
Further to our discovery of errors in the audited accounts Rob Wilson commented that, “I found your findings concerning,” and, “Your claims expose some, to be frank, poor attention to detail on behalf of the auditors and do not fill me with confidence in the firm.” Both ourselves and Rob welcomed the news that the accounts are to be revised by the auditors and resubmitted, and look forward to seeing the restated accounts once the errors have been investigated.
Nevertheless Rob Wilson stood by his original comments upon first reading these accounts, which was that they indicated “good news from a business point of view.” While he believes the club was running well financially he made it clear that investment in playing staff is vital if Leeds are to progress in the coming years. He commented that, “There is a degree of balance that is needed and while it is good that the financial position is good I do believe that there is flexibility now to be more aggressive in the transfer market.”
He expressed disappointment at the lack of any significant activity in the transfer market as he believes Leeds United have the resources to achieve this. Echoing our own Vision Statement he stated that, “I would expect the breakdown of expenditure to be more heavily focused on the football and first team squad side of the business as opposed to other things,” adding further that, “Leeds is one of the most well and actively supported clubs in English football and while a degree of concentration on mainstream opportunities, e.g. real estate etc, is helpful to diversify a portfolio your core business activity must be that of football and achieving on the field of play.” Both Rob and ourselves feel that the concentration should be on football as our main business activity, the core of the club.
Wages and Wage Ratios
Getting into the detail, Rob Wilson commented that the club’s wages to turnover ratio of 51% is outstanding and the club have an enviable position throughout the league system with very few clubs in a better position than this. The positivity of the ratio is not something that we disagree with, but for it to truly be envied as a business performance measure, success on the field must be coupled with it.
Unfortunately this great financial achievement meant that we only finished 14th last season, so it is unlikely that Reading and Southampton, while only managing to attain ratios of 90% & 100%, looked down on us from their promotion spots with much envy; nor would Norwich the season before with an 80% ratio. We do not advocate spending beyond our means to achieve the goal of promotion like these clubs have done; we are not in the fortunate position of having owners such as they do that have kept them afloat with cash injections.
However, what we have that no other club in the Championship has, is a huge and loyal supporter base, which means we are among the top (if not the top) income generators in the division. Unlike the majority of clubs, we could compete with the top six spenders on wages without having to jeopardise good business practices and while maintaining wages ratios that would continue to be the envy of all around us. Rob Wilson agreed with our analysis that a 60% ratio is sustainable.
On our current turnover, this would allow the club to spend up to £20m on wages (we spent £16m in 2011), which would put us firmly in the top six for this division. The importance of this statistic is that Deloitte’s analysis of the Championship (as part of their widely regarded annual football review) has demonstrated that to be in with the best chance of promotion from the Championship to the Premier League, a team has to be among the top wage six spenders in the league. Of course there are other factors involved, as the spending has to be on the right players, but in Neil Warnock we have a tried and trusted campaigner with years of experience, so if he were given a top six budget we are sure our odds for promotion would be even better than Deloitte’s suggest.
Profits
Rob Wilson suggested to us that the 3% profit before tax margin shown in the last set of accounts fares really well in the context of the league. He stated that, “I am certain that Leeds supporters will be one of the few to see their club make a positive return.” We agree with this view, however, we also feel that it masks the reality of our situation.
Obviously the above return was made as a result of the very prudent staff costs and we agree that very few clubs make a profit. Therefore, the immediate thought is that increasing the staff costs will result in losses. However, when we look into the detail once more what we see is a club that manages its staff costs very tightly, but allows other areas of cost to spiral out of control. Back in April this year Shaun Harvey admitted under oath at Leeds County Court that, “we are spending a fortune on legal fees”; our own analysis confirmed that R M Taylor alone received in the region of £1.5m for legal fees over a three year period between 2007-2010, and we can only imagine how much more has been paid to other legal firms. We believe that these costs were unnecessary and would have allowed the club to increase its staff cost budgets if they did not exist.
When looking at profits the other major influence is revenue. Based on the drop in average attendances and what we are being told by our 8,000 members, we conservatively estimate that the club is losing around £2.5m in lost ticket and merchandise sales due to supporters staying away or refusing to spend money on club products until they know that this money will be spent on the team. At a 60% turnover ratio, this would equate to a further £1.5m available in the staff cost budget.
Building / Investment in Non Core Activities
As a recurring theme throughout both Rob Wilson’s and our own analysis we can see that investment in building work has taken priority over the football team. We both agree that, while investment in assets is important, it should not happen to the detriment of the first team squad. Our analysis showed that from the exit of Administration up to the date of the last audited accounts (30 June 2011) the club has committed to spending £16.1m on building and improvements to facilities, while spending £7m on acquiring players, having received £13m on the sale of players. So, it would appear that the profits from player sales are being reinvested in building work with the argument being that we are building future revenue streams. We have had no indication of when these streams will start to benefit the first team, but we do know that the club has had to take out a loan of £5m to be paid off over the next two seasons, and to sell preference shares for £3.2m in order to pay for these future streams. From this we can conclude that it is unlikely that any benefit will be seen for at least two more seasons. While trying to regain our top flight status, this decision seems a little premature at best.
Cash
Cash is king in any business, as businesses that do fail or get into trouble often do so as a result of lack of cash; this is why we felt it was important to produce the special cash report first.
Having shared our report with Rob Wilson before publication he admitted after reading the results that, “The cash analysis that you've done concerns me.” Commenting that, “the assumptions seem sound,” he further agreed with our own conclusions that Leeds United would either have to sell players, obtain further loans or find outside investment if the club were to continue as a going concern. Wilson added that, “based on business principles, to survive a business needs to ensure that a) the selling price is higher than the cost and b) it can pay its debts as they fall due.” He stated that, “The club needs to sell more tickets and attract better sponsorship. To do this you need some more team investment and, in my opinion, a better more associated relationship with the fans.” Wilson heeded the warning of Southampton as an example, where Rupert Lowe fell out of favour for similar reasons to those that exist at Leeds United and the fans started to turn. “The new board has done things differently, won the favour of the fans and they are now in the EPL.”
As a final comment Wilson warned, “I'm not a fan of borrowing against future season ticket sales. The method has been proven to fail in the wrong hands - look at Rangers. Let's hope that the arrangements at Leeds are more supportive and do not destabilise the financial position.”
We did not ask Wilson to comment on this, but the reported cash from the Snodgrass transfer being paid to Close Leasing Limited would further support the concern that we raised about where our money is going in the cash analysis. According to our contacts, the club sold part of the Snodgrass fee to Close Leasing in return for immediately available funds. This would suggest that no funds were immediately available (as there is obviously a cost associated with this transaction, it would not make business sense to assign the debt if it was) and that this cash was required in order to fulfil the transfer activities that have taken place over the summer. As we mentioned the club is likely to have received nearly half their usual annual budget by the end of August, therefore having to sell off future transfer income on top of this is very concerning.
To further support the cash concerns we have also learnt that Neil Warnock has been refused permission to sign two top loan targets that he had lined up; our understanding is that he was told there is insufficient cash available for him to get the players he wanted.
With all the loans and share sales we are hearing about, it is even more concerning to discover that our sister companies have all received financial assistance from the club that we believe are still outstanding at this time. As at the end of the accounting period 30 June 2011, these amounts were reported as follows:
The Takeover?
As we all know this process has appeared to drag on forever, however when you look at a few facts it is not too difficult to understand why it might take longer than other clubs to complete.
Due Diligence
Due Diligence is a complex process and delays often occur as a result of the findings. The situation at Leeds United makes it more complex than at most other football clubs due to the sheer volume of entities that need to be researched. Below is the list of organisations that would need to be investigated and are registered at Companies House as having some form of connection to the club. Listed alphabetically:
Conclusion
As per our Vision Statement we have always shared Ken Bates’ stated aim that the club should be run based upon good business management principles, but when looking at whether the club is being run along proper business lines, there are many factors that we have to take into account. If Mr Bates believes proper lines involves managing staff costs tightly in order to make a profit then he will be satisfied with our findings, however our views of good business management are more extensive. We believe that a properly managed Leeds United would concentrate the majority of its investment on the core business - the team; maximise all its revenue streams by positively engaging with its greatest revenue source – the fans; manage other costs just as tightly as staff related expenses, and ensure that any investments did not leave the club short of cash and in need of expensive loans. Running a business is not complex when these good business management principles are followed.
From our analysis the current situation at Leeds appears to have faltered in terms of these guiding principles and is therefore in need of corrective measures. Further loans or player sales might prevent the club from falling victim to another catastrophic administration process in the short (or even medium) term, but the only long term business solution in our opinion is fresh investment and a new focus. It’s time for change.
Takeover Update from LUST - Thursday 13/09/12
It has been suggested to us that the deal has moved closer to completion over night. The indemnity clause issue may be resolved by members of the buyers consortium offering to indemnify others against any losses incurred as a result of Mr Bates refusal to sign the indeminity. We have yet to confirm this with both of our contacts however if true it demonstrates the desire of the buyers to purchase Leeds United. More to come as we get it.
Further to comments from Ken Bates that the club “will continue to be run along proper lines,” we have undertaken a review of the financial situation at Leeds United. Following on from the latest cash analysis last week, the report below is based upon the views of independent football expert Rob Wilson and our own finance experts. The subjects covered are by no means exhaustive, but help to highlight the overall state of the financial situation at the club.
2011 Audited Accounts
Further to our discovery of errors in the audited accounts Rob Wilson commented that, “I found your findings concerning,” and, “Your claims expose some, to be frank, poor attention to detail on behalf of the auditors and do not fill me with confidence in the firm.” Both ourselves and Rob welcomed the news that the accounts are to be revised by the auditors and resubmitted, and look forward to seeing the restated accounts once the errors have been investigated.
Nevertheless Rob Wilson stood by his original comments upon first reading these accounts, which was that they indicated “good news from a business point of view.” While he believes the club was running well financially he made it clear that investment in playing staff is vital if Leeds are to progress in the coming years. He commented that, “There is a degree of balance that is needed and while it is good that the financial position is good I do believe that there is flexibility now to be more aggressive in the transfer market.”
He expressed disappointment at the lack of any significant activity in the transfer market as he believes Leeds United have the resources to achieve this. Echoing our own Vision Statement he stated that, “I would expect the breakdown of expenditure to be more heavily focused on the football and first team squad side of the business as opposed to other things,” adding further that, “Leeds is one of the most well and actively supported clubs in English football and while a degree of concentration on mainstream opportunities, e.g. real estate etc, is helpful to diversify a portfolio your core business activity must be that of football and achieving on the field of play.” Both Rob and ourselves feel that the concentration should be on football as our main business activity, the core of the club.
Wages and Wage Ratios
Getting into the detail, Rob Wilson commented that the club’s wages to turnover ratio of 51% is outstanding and the club have an enviable position throughout the league system with very few clubs in a better position than this. The positivity of the ratio is not something that we disagree with, but for it to truly be envied as a business performance measure, success on the field must be coupled with it.
Unfortunately this great financial achievement meant that we only finished 14th last season, so it is unlikely that Reading and Southampton, while only managing to attain ratios of 90% & 100%, looked down on us from their promotion spots with much envy; nor would Norwich the season before with an 80% ratio. We do not advocate spending beyond our means to achieve the goal of promotion like these clubs have done; we are not in the fortunate position of having owners such as they do that have kept them afloat with cash injections.
However, what we have that no other club in the Championship has, is a huge and loyal supporter base, which means we are among the top (if not the top) income generators in the division. Unlike the majority of clubs, we could compete with the top six spenders on wages without having to jeopardise good business practices and while maintaining wages ratios that would continue to be the envy of all around us. Rob Wilson agreed with our analysis that a 60% ratio is sustainable.
On our current turnover, this would allow the club to spend up to £20m on wages (we spent £16m in 2011), which would put us firmly in the top six for this division. The importance of this statistic is that Deloitte’s analysis of the Championship (as part of their widely regarded annual football review) has demonstrated that to be in with the best chance of promotion from the Championship to the Premier League, a team has to be among the top wage six spenders in the league. Of course there are other factors involved, as the spending has to be on the right players, but in Neil Warnock we have a tried and trusted campaigner with years of experience, so if he were given a top six budget we are sure our odds for promotion would be even better than Deloitte’s suggest.
Profits
Rob Wilson suggested to us that the 3% profit before tax margin shown in the last set of accounts fares really well in the context of the league. He stated that, “I am certain that Leeds supporters will be one of the few to see their club make a positive return.” We agree with this view, however, we also feel that it masks the reality of our situation.
Obviously the above return was made as a result of the very prudent staff costs and we agree that very few clubs make a profit. Therefore, the immediate thought is that increasing the staff costs will result in losses. However, when we look into the detail once more what we see is a club that manages its staff costs very tightly, but allows other areas of cost to spiral out of control. Back in April this year Shaun Harvey admitted under oath at Leeds County Court that, “we are spending a fortune on legal fees”; our own analysis confirmed that R M Taylor alone received in the region of £1.5m for legal fees over a three year period between 2007-2010, and we can only imagine how much more has been paid to other legal firms. We believe that these costs were unnecessary and would have allowed the club to increase its staff cost budgets if they did not exist.
When looking at profits the other major influence is revenue. Based on the drop in average attendances and what we are being told by our 8,000 members, we conservatively estimate that the club is losing around £2.5m in lost ticket and merchandise sales due to supporters staying away or refusing to spend money on club products until they know that this money will be spent on the team. At a 60% turnover ratio, this would equate to a further £1.5m available in the staff cost budget.
Building / Investment in Non Core Activities
As a recurring theme throughout both Rob Wilson’s and our own analysis we can see that investment in building work has taken priority over the football team. We both agree that, while investment in assets is important, it should not happen to the detriment of the first team squad. Our analysis showed that from the exit of Administration up to the date of the last audited accounts (30 June 2011) the club has committed to spending £16.1m on building and improvements to facilities, while spending £7m on acquiring players, having received £13m on the sale of players. So, it would appear that the profits from player sales are being reinvested in building work with the argument being that we are building future revenue streams. We have had no indication of when these streams will start to benefit the first team, but we do know that the club has had to take out a loan of £5m to be paid off over the next two seasons, and to sell preference shares for £3.2m in order to pay for these future streams. From this we can conclude that it is unlikely that any benefit will be seen for at least two more seasons. While trying to regain our top flight status, this decision seems a little premature at best.
Cash
Cash is king in any business, as businesses that do fail or get into trouble often do so as a result of lack of cash; this is why we felt it was important to produce the special cash report first.
Having shared our report with Rob Wilson before publication he admitted after reading the results that, “The cash analysis that you've done concerns me.” Commenting that, “the assumptions seem sound,” he further agreed with our own conclusions that Leeds United would either have to sell players, obtain further loans or find outside investment if the club were to continue as a going concern. Wilson added that, “based on business principles, to survive a business needs to ensure that a) the selling price is higher than the cost and b) it can pay its debts as they fall due.” He stated that, “The club needs to sell more tickets and attract better sponsorship. To do this you need some more team investment and, in my opinion, a better more associated relationship with the fans.” Wilson heeded the warning of Southampton as an example, where Rupert Lowe fell out of favour for similar reasons to those that exist at Leeds United and the fans started to turn. “The new board has done things differently, won the favour of the fans and they are now in the EPL.”
As a final comment Wilson warned, “I'm not a fan of borrowing against future season ticket sales. The method has been proven to fail in the wrong hands - look at Rangers. Let's hope that the arrangements at Leeds are more supportive and do not destabilise the financial position.”
We did not ask Wilson to comment on this, but the reported cash from the Snodgrass transfer being paid to Close Leasing Limited would further support the concern that we raised about where our money is going in the cash analysis. According to our contacts, the club sold part of the Snodgrass fee to Close Leasing in return for immediately available funds. This would suggest that no funds were immediately available (as there is obviously a cost associated with this transaction, it would not make business sense to assign the debt if it was) and that this cash was required in order to fulfil the transfer activities that have taken place over the summer. As we mentioned the club is likely to have received nearly half their usual annual budget by the end of August, therefore having to sell off future transfer income on top of this is very concerning.
To further support the cash concerns we have also learnt that Neil Warnock has been refused permission to sign two top loan targets that he had lined up; our understanding is that he was told there is insufficient cash available for him to get the players he wanted.
With all the loans and share sales we are hearing about, it is even more concerning to discover that our sister companies have all received financial assistance from the club that we believe are still outstanding at this time. As at the end of the accounting period 30 June 2011, these amounts were reported as follows:
- £1.6m loaned to Yorkshire Radio Limited
- £2.7m Loaned to Leeds United Centenary Pavilion Limited
- £255k Loaned to Leeds United Media Limited
The Takeover?
As we all know this process has appeared to drag on forever, however when you look at a few facts it is not too difficult to understand why it might take longer than other clubs to complete.
Due Diligence
Due Diligence is a complex process and delays often occur as a result of the findings. The situation at Leeds United makes it more complex than at most other football clubs due to the sheer volume of entities that need to be researched. Below is the list of organisations that would need to be investigated and are registered at Companies House as having some form of connection to the club. Listed alphabetically:
- Adulant Force Limited
- Charmed Garden Limited
- Donald Manasse
- Elland Road Limited
- Fan Radio Limited
- FSF Limited
- Halton Sports Limited
- Homer Trust
- Leeds City Holdings Limited
- Leeds City Limited
- Leeds First Limited
- Leeds United 2007 Limited
- Leeds United Association Football Club Limited
- Leeds United Centenary Pavilion Limited
- Leeds United Financial Services Limited
- Leeds United Investment Limited
- Leeds United Media Limited
- Leeds United Retail Limited
- Leeds United Stadium Limited
- Lutonville Holdings Limited
- Outro Limited
- Roman Heavies Limited
- Sporting Consulting Group Limited
- The Leeds United Foundation
- Treliss Designs Limited
- Yorkshire First Limited
- Yorkshire Radio Limited
Conclusion
As per our Vision Statement we have always shared Ken Bates’ stated aim that the club should be run based upon good business management principles, but when looking at whether the club is being run along proper business lines, there are many factors that we have to take into account. If Mr Bates believes proper lines involves managing staff costs tightly in order to make a profit then he will be satisfied with our findings, however our views of good business management are more extensive. We believe that a properly managed Leeds United would concentrate the majority of its investment on the core business - the team; maximise all its revenue streams by positively engaging with its greatest revenue source – the fans; manage other costs just as tightly as staff related expenses, and ensure that any investments did not leave the club short of cash and in need of expensive loans. Running a business is not complex when these good business management principles are followed.
From our analysis the current situation at Leeds appears to have faltered in terms of these guiding principles and is therefore in need of corrective measures. Further loans or player sales might prevent the club from falling victim to another catastrophic administration process in the short (or even medium) term, but the only long term business solution in our opinion is fresh investment and a new focus. It’s time for change.
Takeover Update from LUST - Thursday 13/09/12
It has been suggested to us that the deal has moved closer to completion over night. The indemnity clause issue may be resolved by members of the buyers consortium offering to indemnify others against any losses incurred as a result of Mr Bates refusal to sign the indeminity. We have yet to confirm this with both of our contacts however if true it demonstrates the desire of the buyers to purchase Leeds United. More to come as we get it.