Leeds United Financial Analysis LUST Update
LUST 7/1/13
Back in September 2012, we undertook a detailed review of the finances at Leeds United and made a number of comments and predictions. We can now revisit these in light of the latest accounts (to June 2012) that have been submitted, somewhat earlier than in previous years possibly due to greater efficiencies or perhaps because it means that further financial details regarding the takeover will not need to be disclosed until next year…
Headlines
These accounts show the situation at Leeds United as at the end of June 2012 - the end of 2011/12 season, and the early days of takeover negotiations. The six months between this accounting period and GFH Capital’s takeover showed no alteration in the way the club was run under Ken Bates and Shaun Harvey, meaning that we can assume the trends shown in these accounts have continued in that time. It is clear by just looking around Elland Road on matchdays that gate receipts so far in 2012/13 must be even worse than for the same period in 2011/12, itself a 10% drop from the previous season.
Despite Ken Bates’s constant assurances that the club was being run “along proper business lines,” the accounts show that as the club made almost no effort to arrest the slide in attendances and consequent decreasing turnover, the only way the club could stay afloat was through player sales, loans, and eventually outside investment. The club now has potentially £19.4m of debt. The much heralded building works and off field improvements have so far cost the club nearly £18m, and yielded nothing by way of profit.
Despite this, Shaun Harvey still states in the directors’ report that “The growth on [sic] non-matchday revenue remains critical to our plans so the dependency of success on the field is reduced over a period of time.”
Given that the football side, by virtue of player transfers, has been required to keep the club afloat while the losses of the non-matchday side grow ever greater; and that non-matchday activities will need to earn around £20m to pay for the building works and the interest on loans associated with it before it can show a profit; that lack of investment on the pitch has brought us to a position where less than 20,000 people can be found to watch football at Elland Road; and that as a result gate receipts and turnover have taken a serious downturn; we remain totally convinced that Ken Bates and Shaun Harvey have had the wrong strategy for success at Leeds United.
Summary of Numbers
(Excluding Player Trading)
Rob Wilson’s Comments of 2011 accounts
In his independent assessment of the 2011 accounts, sports finance expert Rob Wilson commented that he would: “Expect to see investment in playing staff.” The 2012 accounts show that in reality LUFC made a net profit of £2.5m from player trading during 2011/12 and in cash terms received £3m from the transactions during the period.
Rob also advised that the club need to sell more tickets to attract better sponsorship, which could be achieved by investment in the team and improved relations with the fans. Perhaps the drop in gate receipts and commercial income in 2011/12, leading to an overall 4% drop in turnover, reflect the fact that none of this advice was taken by the management of the club during this period.
Turnover
Back in September 2012 we predicted a decrease of £2.5m in turnover from the 2011 numbers: this decrease was a prediction for the current season (to June 2013) rather than the 2012 accounting period covered here. We actually felt that the 2012 figure would be down by roughly £0.6m, so the larger £1.6m shortfall revealed in the 2012 accounts means that if anything our prediction for 2013 could be optimistic as crowds have fallen even further this season. Therefore, unless there is a dramatic turn-around in attendances during the remainder of this season, we still expect further bad news on the turnover for 2013 - although we now hold out some hope that the turn-around will happen under the new owners, with the offer of half season tickets a good start.
Wages to Turnover
This ratio has increased from 51% (in 2011) to 57% (in 2012), which is partially due to the £1.6m decrease in turnover, and partially due to the £1.3m increase in wages. In spite of this it will still remain one of the lowest ratios in the league.
The highest paid director – believed to be Shaun Harvey - was paid £226k, increased from £212k in 2011, with pension payments and benefits taking his remuneration up to £259k. As ever, “K W Bates did not receive any emoluments or benefits during the year,” meaning the remaining £86k of the total directors’ emoluments of £312k was split between Yvonne Allen and Peter Lorimer. As additional directors’ emoluments over and above Harvey’s only appeared on the accounts after Allen joined the board, we assume the majority of this was paid to her.
Other Costs
We commented in September that a 60% wages to turnover ratio was sustainable, which appears to contradict the current predicament as a 57% ratio has resulted in an operating loss (excluding player trading) of £2.2m. However, as we explained at the time, wages management was only part of the equation here and we can see that it appears that other costs have been allowed to get even more out of control by the previous management team.
Excluding wages, the other administrative costs of the business increased by 14% (£1.2m) from 2011 and now stand at £9.8m (£8.6m in 2011), on the reduced Turnover of £31.1m. We were of the belief that £8.6m was too high for administrative costs in 2011 and therefore still believe that, with better financial controls to keep administrative costs down, we could have posted a positive return for 2011/12 without resorting to player sales to cover these costs.
We cannot comment in too much detail on where we would make these cost savings as most of the exact costs are not disclosed to the public. An amount of £5.2m is “unknown” in the administrative costs for 2012 (up by £668k from £4.6m in 2011) – however, this figure will include any legal charges incurred by the club which, we are sure Shaun Harvey would agree, could be a significant area in which to find savings.
We can see that in profit terms the upgrading of facilities has impacted the bottom line by a further £325k (depreciation now stands at £1.2m in total for 2012) over the previous year, plus an additional £250k was paid for a 4 year option to purchase more land from Leeds City Council to further develop the East Stand. These areas could have provided further savings.
On top of that the cost of selling Preference Shares to Lutonville Holdings (a company that according to the accounts appears to be controlled by Ken Bates) was £107k, and additional accounting charges over and above the £53k last year of £59k were incurred in 2012 (taking the total paid to £112k in 2012 - £44k of this was directly related to Preference share monitoring).
Building Update
These latest accounts show that since administration the club has spent £17.7m in cash on “building future income that will benefit the club for years to come” (or buildings to you and I).
While we still await with great anticipation the cash delivery of this building strategy championed so often by Ken Bates, we can see that the club have received £8.4m in cash via net player trading (or selling the talent) to partially fund these buildings, with the remainder coming from the well publicised borrowing facilities (courtesy of Lutonville, Ticketus 2 LLP, Enterprise and whatever was left of the future Season Ticket sales cash).
We note in the Directors report that Shaun Harvey believes in Ken Bates’s investment strategy regarding the East Stand development, as he states that it “will deliver financial benefit to the club on both matchdays and non matchdays for years to come.” We would like Mr Harvey to expand on this statement and explain when he believes the investment will pay back the £17.7m already spent, plus the interest on the various loans, and the £800k premium and £151k expenses on the Preference Shares, all of which have been paid additionally in order to finance the building works. We are struggling to understand how or when the corporate facilities will generate the c£20m of additional income required to break-even.
Furthermore, we note that this strategy has seemingly been devised “so the dependency of success on the field is reduced over time,” which leaves us concerned that Ken Bates and Shaun Harvey did not share the fans’ desire to see us win every game and get back into the Premier League and Europe. It also leaves us wondering if football is in fact in the right business altogether for their aspirations?
We note that capital commitments have reduced from £6.5m in 2011 to just £132k, meaning that if no commitments have been made since this accounting period, GFH Capital are in a position to stop further development on the East Stand if they wish.
Cash
As we stated back in September, our belief was that the club needed to sell players, obtain further loans or seek outside investment (or a combination of all three) in order to continue as a going concern. The latest accounts support this statement in full as we can see that sale of players netted the club £3m in cash during the year, a further loan was taken out via Enterprise insurance for £1.5m and new investment has been found via GFH Capital!
Whether our cash problems are now solved remains to be seen but, based upon these accounts, we can see that GFHC have not inherited an easy situation and will need to invest cash of their own or the existing downwards trends will continue, in the short term at least.
The Group loans situation remains a cash drain on Leeds United, as the club is still owed a net amount of £3.1m from its sister companies, broken down as follows:
Debts
As GFH Capital look to complete their takeover we looked into the debt they will inherit from Ken Bates; given his pride in leaving us debt free the result was surprising. Assuming the new owners adopt a strategy that sees use promoted to the Premier League before the 2017/18 season the following debts will need to be settled:
In the five years since administration Ken Bates and Shaun Harvey have managed to accumulate debts amounting to around the same amount as those that put us into administration in the first place. We just hope that the creditors are more patient this time (and don’t include HMRC).
The preference share at £3.2m incurred £151k of additional administrative costs, with £4m payable to Lutonville Holdings upon “change of control” of the company. The accounts state that: “Significant influence is exerted over Lutonville Holdings Limited by virtue of its connection to Outro Limited which is wholly owned by Mr K W Bates.” These shares were issued to Lutonville exactly a year to the day before the “change of control” to GFH Capital and £4m is now payable to Lutonville; these accounts show that an injection of cash would be required to pay this.
The loan from Enterprise was taken at 7% interest in October 2012, with the takeover nearing completion. It seems strange that a loan could not be obtained from a bank at a better rate; or
that GFH Capital were not willing to put more money in themselves, if they were confident of completing the takeover, in order to avoid this the large cost of this loan.
Overall net debt increased in 2011/12 by £3.89m, or 297%, from 2010/11. Future income from two years of season tickets sales, and five years of profits from catering, have been mortgaged to finance the running of the business.
Group Companies
The finances of the football club’s sister companies continue to be poor with losses for the year posted by all of them amounting to £781k - making the overall total losses of these companies £4.94m. This breaks down as follows:
This period covered the second year of operation of the Pavilion, and its losses increased from £196k in 2011 to £234k in 2012. This does not include staff costs, as the accounts state the Pavilion has no employees.
As with the East Stand development, we were promised by Ken Bates that these businesses would add to our income streams and make the club more sustainable, yet in five years since administration it appears that all they are doing is racking up additional costs and taking investment away from the field of play. We would be keen to understand when these businesses will start to repay their past debts and start contributing to the football club.
Conclusion
Despite certain questionable management decisions by Ken Bates and Shaun Harvey during the last five years we still feel that, beneath it all, GFH Capital have inherited a club that can be turned around into a successful and sustainably profitable one, with investment in the team and cost cutting in the right areas. There are significant challenges facing the new ownership in the immediate future and big decisions will need to be made regarding the viability of some of these historic investment decisions. GFH Capital will also need to be prepared to invest cash in the short term into areas that have been badly neglected, not least the playing squad. The legacy of spending £17.7m on building projects that have yet to bring any benefit, and have been a drain on the club’s playing resources, will not be easy to shake off.
The advice of Rob Wilson after the last accounts still rings true: the club need to encourage the loyal fan base back to Elland Road by investing in the team and engaging with the fans, which in turn will help them to sell more tickets, attract better sponsorship, and hopefully get us back to a place in the Premier League. From there we can all march on together to greater and more profitable heights!
Back in September 2012, we undertook a detailed review of the finances at Leeds United and made a number of comments and predictions. We can now revisit these in light of the latest accounts (to June 2012) that have been submitted, somewhat earlier than in previous years possibly due to greater efficiencies or perhaps because it means that further financial details regarding the takeover will not need to be disclosed until next year…
Headlines
- Group turnover decreased by 4% from £32.6m to £31.1m
- Gate receipts decreased by 10.6% from £12.7m to £11.3m
- Wages to turnover ratio increased from 51% to 57%
- Overall admin costs increased from £8.6m to £9.8m
- “Unknown” admin costs increased from £4.5m to £5.2m
- Shaun Harvey was paid £259k including pension payments and benefits
- Since administration, the club has spent £17.7m in cash on building works
- Yorkshire Radio, LU Pavilion, LU Media and Leeds City Holdings lost a combined £781k in 2011/12
- The combined losses of these companies now total £4.94m
- Yorkshire Radio and the Pavilion owe LUFC £3.7m; LUFC owes LCH and LU Media £600k
- Profits from player sales - £2.5m - were required to keep the club afloat
- Preference shares issued to Lutonville Holdings - apparently controlled by Ken Bates - incurred admin costs of £107k
- £4m was payable to Lutonville upon “change of control,” which occurred a year to the day after the £3.2m share issue
- Future income from two years of season tickets and five years of catering profits has been mortgaged
- Net debt increased by 297% - £3.89m - in 2011/12
- The new owners look set to inherit £19.4m worth of debt.
These accounts show the situation at Leeds United as at the end of June 2012 - the end of 2011/12 season, and the early days of takeover negotiations. The six months between this accounting period and GFH Capital’s takeover showed no alteration in the way the club was run under Ken Bates and Shaun Harvey, meaning that we can assume the trends shown in these accounts have continued in that time. It is clear by just looking around Elland Road on matchdays that gate receipts so far in 2012/13 must be even worse than for the same period in 2011/12, itself a 10% drop from the previous season.
Despite Ken Bates’s constant assurances that the club was being run “along proper business lines,” the accounts show that as the club made almost no effort to arrest the slide in attendances and consequent decreasing turnover, the only way the club could stay afloat was through player sales, loans, and eventually outside investment. The club now has potentially £19.4m of debt. The much heralded building works and off field improvements have so far cost the club nearly £18m, and yielded nothing by way of profit.
Despite this, Shaun Harvey still states in the directors’ report that “The growth on [sic] non-matchday revenue remains critical to our plans so the dependency of success on the field is reduced over a period of time.”
Given that the football side, by virtue of player transfers, has been required to keep the club afloat while the losses of the non-matchday side grow ever greater; and that non-matchday activities will need to earn around £20m to pay for the building works and the interest on loans associated with it before it can show a profit; that lack of investment on the pitch has brought us to a position where less than 20,000 people can be found to watch football at Elland Road; and that as a result gate receipts and turnover have taken a serious downturn; we remain totally convinced that Ken Bates and Shaun Harvey have had the wrong strategy for success at Leeds United.
Summary of Numbers
(Excluding Player Trading)
Rob Wilson’s Comments of 2011 accounts
In his independent assessment of the 2011 accounts, sports finance expert Rob Wilson commented that he would: “Expect to see investment in playing staff.” The 2012 accounts show that in reality LUFC made a net profit of £2.5m from player trading during 2011/12 and in cash terms received £3m from the transactions during the period.
Rob also advised that the club need to sell more tickets to attract better sponsorship, which could be achieved by investment in the team and improved relations with the fans. Perhaps the drop in gate receipts and commercial income in 2011/12, leading to an overall 4% drop in turnover, reflect the fact that none of this advice was taken by the management of the club during this period.
Turnover
Back in September 2012 we predicted a decrease of £2.5m in turnover from the 2011 numbers: this decrease was a prediction for the current season (to June 2013) rather than the 2012 accounting period covered here. We actually felt that the 2012 figure would be down by roughly £0.6m, so the larger £1.6m shortfall revealed in the 2012 accounts means that if anything our prediction for 2013 could be optimistic as crowds have fallen even further this season. Therefore, unless there is a dramatic turn-around in attendances during the remainder of this season, we still expect further bad news on the turnover for 2013 - although we now hold out some hope that the turn-around will happen under the new owners, with the offer of half season tickets a good start.
Wages to Turnover
This ratio has increased from 51% (in 2011) to 57% (in 2012), which is partially due to the £1.6m decrease in turnover, and partially due to the £1.3m increase in wages. In spite of this it will still remain one of the lowest ratios in the league.
The highest paid director – believed to be Shaun Harvey - was paid £226k, increased from £212k in 2011, with pension payments and benefits taking his remuneration up to £259k. As ever, “K W Bates did not receive any emoluments or benefits during the year,” meaning the remaining £86k of the total directors’ emoluments of £312k was split between Yvonne Allen and Peter Lorimer. As additional directors’ emoluments over and above Harvey’s only appeared on the accounts after Allen joined the board, we assume the majority of this was paid to her.
Other Costs
We commented in September that a 60% wages to turnover ratio was sustainable, which appears to contradict the current predicament as a 57% ratio has resulted in an operating loss (excluding player trading) of £2.2m. However, as we explained at the time, wages management was only part of the equation here and we can see that it appears that other costs have been allowed to get even more out of control by the previous management team.
Excluding wages, the other administrative costs of the business increased by 14% (£1.2m) from 2011 and now stand at £9.8m (£8.6m in 2011), on the reduced Turnover of £31.1m. We were of the belief that £8.6m was too high for administrative costs in 2011 and therefore still believe that, with better financial controls to keep administrative costs down, we could have posted a positive return for 2011/12 without resorting to player sales to cover these costs.
We cannot comment in too much detail on where we would make these cost savings as most of the exact costs are not disclosed to the public. An amount of £5.2m is “unknown” in the administrative costs for 2012 (up by £668k from £4.6m in 2011) – however, this figure will include any legal charges incurred by the club which, we are sure Shaun Harvey would agree, could be a significant area in which to find savings.
We can see that in profit terms the upgrading of facilities has impacted the bottom line by a further £325k (depreciation now stands at £1.2m in total for 2012) over the previous year, plus an additional £250k was paid for a 4 year option to purchase more land from Leeds City Council to further develop the East Stand. These areas could have provided further savings.
On top of that the cost of selling Preference Shares to Lutonville Holdings (a company that according to the accounts appears to be controlled by Ken Bates) was £107k, and additional accounting charges over and above the £53k last year of £59k were incurred in 2012 (taking the total paid to £112k in 2012 - £44k of this was directly related to Preference share monitoring).
Building Update
These latest accounts show that since administration the club has spent £17.7m in cash on “building future income that will benefit the club for years to come” (or buildings to you and I).
While we still await with great anticipation the cash delivery of this building strategy championed so often by Ken Bates, we can see that the club have received £8.4m in cash via net player trading (or selling the talent) to partially fund these buildings, with the remainder coming from the well publicised borrowing facilities (courtesy of Lutonville, Ticketus 2 LLP, Enterprise and whatever was left of the future Season Ticket sales cash).
We note in the Directors report that Shaun Harvey believes in Ken Bates’s investment strategy regarding the East Stand development, as he states that it “will deliver financial benefit to the club on both matchdays and non matchdays for years to come.” We would like Mr Harvey to expand on this statement and explain when he believes the investment will pay back the £17.7m already spent, plus the interest on the various loans, and the £800k premium and £151k expenses on the Preference Shares, all of which have been paid additionally in order to finance the building works. We are struggling to understand how or when the corporate facilities will generate the c£20m of additional income required to break-even.
Furthermore, we note that this strategy has seemingly been devised “so the dependency of success on the field is reduced over time,” which leaves us concerned that Ken Bates and Shaun Harvey did not share the fans’ desire to see us win every game and get back into the Premier League and Europe. It also leaves us wondering if football is in fact in the right business altogether for their aspirations?
We note that capital commitments have reduced from £6.5m in 2011 to just £132k, meaning that if no commitments have been made since this accounting period, GFH Capital are in a position to stop further development on the East Stand if they wish.
Cash
As we stated back in September, our belief was that the club needed to sell players, obtain further loans or seek outside investment (or a combination of all three) in order to continue as a going concern. The latest accounts support this statement in full as we can see that sale of players netted the club £3m in cash during the year, a further loan was taken out via Enterprise insurance for £1.5m and new investment has been found via GFH Capital!
Whether our cash problems are now solved remains to be seen but, based upon these accounts, we can see that GFHC have not inherited an easy situation and will need to invest cash of their own or the existing downwards trends will continue, in the short term at least.
The Group loans situation remains a cash drain on Leeds United, as the club is still owed a net amount of £3.1m from its sister companies, broken down as follows:
- Leeds United Centenary Pavilion Limited - £2.6m
- Yorkshire Radio Limited - £1.14m
- With Leeds United owing:
- Leeds City Holdings Limited - (£0.26m)
- Leeds United Media Limited – (£0.38m)
Debts
As GFH Capital look to complete their takeover we looked into the debt they will inherit from Ken Bates; given his pride in leaving us debt free the result was surprising. Assuming the new owners adopt a strategy that sees use promoted to the Premier League before the 2017/18 season the following debts will need to be settled:
- Preference Share payment to Lutonville £4.0m
- Ticketus 2 LLP Loan Repayment £2.3m
- Enterprise Loan repayment £1.7m
- Krato Loan Repayment £0.2m
- Payment to liquidators £4.8m
- Working Capital Shortfall £6.4m
- TOTAL DEBT £19.4m
In the five years since administration Ken Bates and Shaun Harvey have managed to accumulate debts amounting to around the same amount as those that put us into administration in the first place. We just hope that the creditors are more patient this time (and don’t include HMRC).
The preference share at £3.2m incurred £151k of additional administrative costs, with £4m payable to Lutonville Holdings upon “change of control” of the company. The accounts state that: “Significant influence is exerted over Lutonville Holdings Limited by virtue of its connection to Outro Limited which is wholly owned by Mr K W Bates.” These shares were issued to Lutonville exactly a year to the day before the “change of control” to GFH Capital and £4m is now payable to Lutonville; these accounts show that an injection of cash would be required to pay this.
The loan from Enterprise was taken at 7% interest in October 2012, with the takeover nearing completion. It seems strange that a loan could not be obtained from a bank at a better rate; or
that GFH Capital were not willing to put more money in themselves, if they were confident of completing the takeover, in order to avoid this the large cost of this loan.
Overall net debt increased in 2011/12 by £3.89m, or 297%, from 2010/11. Future income from two years of season tickets sales, and five years of profits from catering, have been mortgaged to finance the running of the business.
Group Companies
The finances of the football club’s sister companies continue to be poor with losses for the year posted by all of them amounting to £781k - making the overall total losses of these companies £4.94m. This breaks down as follows:
- Yorkshire Radio Limited: £101k - taking their total losses to £1.66m
- Leeds United Centenary Pavilion Limited: £234k - taking their total losses to £431k
- Leeds United Media Limited: £23k - taking their total losses to £25k
- Leeds City Holdings Limited: £423k - taking their total losses to £2.83m
This period covered the second year of operation of the Pavilion, and its losses increased from £196k in 2011 to £234k in 2012. This does not include staff costs, as the accounts state the Pavilion has no employees.
As with the East Stand development, we were promised by Ken Bates that these businesses would add to our income streams and make the club more sustainable, yet in five years since administration it appears that all they are doing is racking up additional costs and taking investment away from the field of play. We would be keen to understand when these businesses will start to repay their past debts and start contributing to the football club.
Conclusion
Despite certain questionable management decisions by Ken Bates and Shaun Harvey during the last five years we still feel that, beneath it all, GFH Capital have inherited a club that can be turned around into a successful and sustainably profitable one, with investment in the team and cost cutting in the right areas. There are significant challenges facing the new ownership in the immediate future and big decisions will need to be made regarding the viability of some of these historic investment decisions. GFH Capital will also need to be prepared to invest cash in the short term into areas that have been badly neglected, not least the playing squad. The legacy of spending £17.7m on building projects that have yet to bring any benefit, and have been a drain on the club’s playing resources, will not be easy to shake off.
The advice of Rob Wilson after the last accounts still rings true: the club need to encourage the loyal fan base back to Elland Road by investing in the team and engaging with the fans, which in turn will help them to sell more tickets, attract better sponsorship, and hopefully get us back to a place in the Premier League. From there we can all march on together to greater and more profitable heights!
