LUST Analysis of LUFC Accounts - Part 1 of 2

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.

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.