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      « ‘Time For Change’ | Main | Where Has the Money Gone? »
      Thursday
      Sep132012

      Leeds United - Financial Analysis 2012

      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 fairs 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

      This totals nearly £4.6m, which makes us wonder whether, if it had been repaid, we would still have needed to borrow £5m from future season ticket sales. We are unsure if further assistance has been provided to any of these companies since this date.

      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

      There are 27 firms on this list and it is likely that, given we know a number are based offshore, there could be even more. By comparison, the new owners of Nottingham Forest would only have had to look into the details of 4 entities. The above list might also help to explain why an indemnity is so important to any buyer of the club. While assurances on the selling side should make the buyer comfortable that no major unknown issues exist and the due diligence process should further support this, looking at the volume of entities involved above, it would not be difficult to imagine how either party could have missed something and would want indemnities to protect them.

      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.


      Supporters can also join more than 7,900 other Leeds fans and have their voice heard as members of the Leeds United Supporters’ Trust by filling in the form atwww.lufctrust.org. Membership is free. Keep checking for updates on www.lufctrust.org, and our Facebook and Twitter pages.

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      Reader Comments (14)

      Good work once again by LUST getting this out into the public domain.

      The above analysis makes for very worrying reading but really just re-affirms what many people have known for some considerable time; that the club is being slowly strangled.

      Bates' position at the club is simply untenable and has been for some time. The good news though is that we are at the tipping point.

      We've known for some time that reducing attendances were hitting the Bates regime where it hurts most, namely the coffers! I am one of the people that did not renew my ST, nor will I until Bates has gone! Enough is enough we say, he's got to go.

      The fans are effectively engaged in asymmetric warfare against the Bates regime. The best weapon we have to use against him is the withdrawal of our funding. The message needs to be very clearly spelt out to the Bates regime. If he does not sign and leave the fans will collectively refuse to renew or pay any more money to him! I don't claim to know that the buyers are good people but at least they are willing to put money into the club and are prepared to realise its potential.

      No more dough to Monaco! Pack up Kenny, it's time to go!

      #BatesOut

      September 13, 2012 | Unregistered CommenterJettatura

      Fantastic article LUST, keep up the good work. People are becoming more and more aware of the unstable financial situation at Leeds Utd. Bates really needs to go as he has shown over and over that he is unwilling to invest any of his personal pocket. We are only doing ok due to players sales but how long can this last? It is a totally unsustainable business model and with attendances dropping even Bates must realise that he has reached the end of the road with Leeds Utd. He can go no further. Like LUST so rightly put, 'It's time for change'.

      September 13, 2012 | Unregistered CommenterTom

      Jettatura, witholding funds from the club is a very dangerous course of action.

      The club has substantial fixed overheads (regardless of whether KB removes money via other shady companies) and attacking the club's main source of income will inevitably just increase the likelihood of the following:

      (a) reducing spending on players
      (b) force the club into selling its best players
      (c) increase the likelihood that the club will make a loss over the current financial year
      (d) prompt KB to grab all he can from the club while he can
      (e) push the club towards insolvency

      Yes it will hurt Bates, but it's kinda like a hostage situation - try to hurt the guy with the gun and it's likely the hostages will be dead before the gunman is...

      September 13, 2012 | Unregistered Commenterzedfour

      Zedfour - I understand your point and it's well made.

      It's not something I suggest lightly but we now find ourselves at the stage where drastic action is required. You don't question a surgeon if he says that in order to save the patient he has to amputate the leg!

      When should we take action? When Bates has put the club into administration again? (making sure to cream off his share first!)

      In asymmetrical conflicts, the smaller player wins when the larger player commits reflexive self-damage.

      We ARE at the tipping point!

      September 13, 2012 | Unregistered CommenterJettatura

      Zedfour if you or someone close had an illness that meant a painfull treatment that would in the short term would cause them and you pain but would mean a long and bright future would you dismiss it because of the short term hit?

      Those advocating boycotting the club see LUFC in that state I've not renewed my ST's for the 1st time in 36yrs I won't spend another penny on LUFC until change occurs SideBeforeSelf was what I was brought up on as a lad watching LUFC and as painfull as not going to ER means to me I take solace in the belief Billy & The Don would be leading the fight against bates if they were still with us.

      September 13, 2012 | Unregistered CommenterChicago White

      jettatura and Chicago,

      I really do understand how you feel - I feel it too.

      Your points about amputation and painful treatment only hold up because you both assume that the patient will live. I fear that the patient may never recover.

      When Bates bought the club, there were a lot of people sniffing around, but only he put his hand in his pocket and pulled us out of the mire. (Don't think that I'm in favour of KB because I say that - I'm just stating the facts of the matter).

      My worry is that the club will have a couple of seasons of free-fall football followed by painful administration and (at best because the FL never do Leeds any favours) a relegation into the basement (like Rangers) or at worst liquidation and redevelopment of Elland Road when it's sold off to builders.

      We're playing with fire. I realise that there's probably no "right answer" to all this since the alternative of keeping KB where he is will probably end up in a similar mess, but I for one think that keeping the money flowing into ER will at least keep the club stable and continue to make it a *buyable* going concern.

      For either scenario, what we need is an incredibly wealthy Middle-Eastern Leeds fan who has more money than sense and doesn't mind being taken for a few extra millions by KB when he buys the club and finds the skeletons KB has inevitably left behind.

      September 13, 2012 | Unregistered Commenterzedfour

      Good work i am another who refused to renew 4 x season tickets and will not until bates dies or goes stand firm and boycott and the cancer will go.

      September 13, 2012 | Unregistered CommenterLeedsAndProud

      More hard work and another excellent report from your financial advisers helping to shed some light on how our club is run. Well done. However, one facet which has barely gets a mentioned either here or on other sites is the potential impact of the 70:30 split in the current ownership between Bates and the unknown other investor/s . It would be interesting to have LUST's views on this.

      To my mind, the current structure acts as an impediment to fresh investment going into the club. For example, if Bates or the potential new owners wanted to invest say £10m on new players it could be expected that the unknown investor would need to stump up £3m (30%) as its share. If the unknown investor would not or could not raise this money and Bates / the new investors went ahead anyway all they would be doing is giving the unknown investor a free ride. I don't know many people who would be prepared to do this. The likely result is that the only investment on players is that which is generated internally from within the club. On the other hand, it seems to me to be far easier to sell assets since all you need to do is split the proceeds 70:30.

      There are other aspects of this partnering arrangement which may bear on the current takeover, particularly whether or not the unknown shareholder has the right to withhold consent to the assignment of Bates' shareholding. Do we know anything about this or indeed whether or not the new investors are trying to buy out the unknown investor?

      September 13, 2012 | Unregistered Commenterwhitesteel22

      Super, balanced and considered analysis. Great work.

      September 13, 2012 | Unregistered CommenterTony Ives

      whitesteel22 - I presume they could just issue (to themselves) new shares valued at 10 million popunds, thereby increasing their stake.

      September 14, 2012 | Unregistered CommenterGrumpy

      Another excellent article - the knowledge of LUST knows no bounds!!

      September 14, 2012 | Unregistered CommenterOriginal Koppite

      Grumpy - all the agreements I have seen (but I'm certainly not an expert on any of this) would prohibit the creation of new shares in this way since it effectively reduces your partners holding in the company without them having any say in the matter. If it were otherwise you might expect the ME consortium to try negotiate with the unknown shareholder and then try to dilute Bates shareholding to the point where he had no control over the club...hmm nice thought!

      September 14, 2012 | Unregistered Commenterwhitesteel22

      Important for partners to keep control of process. Just read white paper about benefits of sell-side due diligence. http://bit.ly/PHnSmZ

      September 18, 2012 | Unregistered CommenterIdacl

      Important for partners to keep control of process. Just read white paper about benefits of sell-side due diligence. http://bit.ly/PHnSmZ

      September 18, 2012 | Unregistered CommenterIdacl

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