Leeds United Financial Analysis Update Part 2 of 2

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!

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Leeds United Supporters Trust
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