Wednesday, 3 April 2013

Long-term strategic ownership? A few thoughts on GFH's performance so far...

The question of ownership can often be controversial, especially when linked to something as emotive as a football club. The question of what or whom is a good or bad owner largely comes down to personal opinion and with Leeds and its recent history this is especially so. I personally stand with a foot in both camps. From a pure supporter perspective, the possibility of fan ownership or ownership by a supporters group is immensely attractive, but as a realist, working in the investment industry, I can see that a business such as Leeds United will always attract interest from professional investors.

It is very easy to class one or the other as a "good" or "bad" owner, arguably most football supporters would rightly argue that SISU Capital, owners of Coventry, or the Venkys would represent an example of bad ownership. However, for every SISU/Venky ownership, there is an ADUG, the Abu Dhabi investment consortium that bought Manchester City, or a Fenway Sports Group. In my opinion, there is no reason why an investment firm or consortium with no historical link to the club cannot be a good owner.

And so to the curious case of Leeds United. It is sometimes worth reflecting where Leeds have come from, something which has often been forgotten in recent months. If Leeds United was a patient a year ago, it would have been in intensive care, with the paddles charged and the Grim Reaper standing by the door. Rightly or wrongly, without GFH's or another outside party's intervention and capital during the course of last year, I strongly believe Leeds United would most likely have ended up back in administration. A cashflow dedicated to spurious building projects to the detriment (as critiqued brilliantly by Amitai Winehouse here) of the playing squad, and funded by debt and player sales had left us in a perilous position, and for taking us off the critical list alone, I for one will always be grateful to GFH.

It is one thing however to save a sick person's life, but its another to administer the medicine to cure them. For me, Leeds United as a business has the following issues which need addressing:
  1. Poor cashflow generation: effectively the business isn't creating enough cash to support its activities
  2. A lack of long-term strategic investment: A playing squad which has been chronically underfunded and plundered to support the cashflow rather than invested in.
  3. Lack of engagement with the customer base: A customer base (the supporters) who have become disinterested in the product on offer.
  4. Lack of stability and vision: Lack of clarity in the future of the business and its aims.

For me, GFH seem to have made good steps to address point 1 (which should largely be addressed should the remainder be sorted satisfactorily), to some extent point 3, and in my opinion it is too early to judge their performance against point 2.

In the short-term, it is point 4, a lack of stability and vision which is in danger of seriously damaging the club. For most businesses, It is not necessary for management to explain in detail to its customers how it is expected to move forward over the medium/long-term, however a football club, especially one with a fanbase as engaged as Leeds United, it is crucial.

Leeds United over the past 12 months has been dominated by uncertainty in terms of ownership which has continued under GFH with a variety of contradictory messages, with official statements professing a desire for "long-term" and "strategic" ownership, whilst releases to the stock exchange detail the desire for a short-term exit, and the involvement of investors who look to be keen to make a short-term investment return (see here). The long-term ownership and vision for the strategic direction of the club needs to be clarified and explained to a supporter base who have remained loyal in the face of disinterest for far too long. More importantly, no new manager of a sufficient calibre will be attracted to Leeds United without understanding and buying into the long-term vision of its owners. When said owner has the club as "held for sale" in their books, it does little to suggest a long-term and strategic approach.

Over the medium-term, point 2 in particular needs addressing, and to do so, Leeds United need to have an ownership structure in place with the necessary funds to invest for the long term in the playing squad, to enable the club to challenge effectively in the Championship, but also to attract the calibre of manager required to secure promotion. As can be seen from my earlier blogs, the financial statements released by both GFH and IIB raise concerns over the ability of both businesses to fund the strategic investment required by Leeds to take the club forward. There may be investors standing behind both enterprises willing to fund future investment but this is unclear, and given the high leverage of GFH in particular, one has to be concerned over the long-term viability of their business model. GFH Capital have often said they have a separate funding source to GFH and are therefore independent, however this is contradicted by the fact that Leeds United Holdings is held on the balance sheet of GFH.

Buying and running a business is difficult, buying and running a football club, with the constant attention and interest groups involved is exceptionally so, however I still think that Leeds United deserve a lot better than the status quo. Whilst I will always be grateful to GFH for removing Bates from the equation and for stabilising the business in a period of great uncertainty, I also believe that Leeds requires an ownership understands the history and legacy of the club, is prepared to engage with the fans on a more effective basis, and is able to outline a long-term strategic vision for where they hope to take the club.

Whether this is through a supporter-owned model or whether it is through a professional investment house which understands the nuances of our great club, I am relatively neutral, but it is clear that both financial capital and a vision are required to move us forward, and to ultimately build a successful football club, built on the support of an enfranchised and inspired supporter base. At this stage, it is doubtful to my mind whether GFH have the ability or vision to achieve this.

Monday, 1 April 2013

GFH and IIB - Long-Term Strategic Investment?

Last week saw GFH achieve the sale of a 10% stake in Leeds United Holdings Ltd to International Investment Bank (IIB), a Bahrain-based investment bank. David Haigh's comments at the time were as follows:

"The introduction of IIB is in keeping with what have always been GFH Capital's aims for the successful, sustainable and long term ownership of Leeds United FC.
"We believe that a consortium of like-minded investors provides the best ownership model for a club which belongs among the elite of English football clubs and global sporting brands.
"It is our aim to provide the finance and the stability to enable the club to complete that journey as soon as possible."

I'm going to come back to that statement in a minute, but first a brief look at IIB and their business activities. IIB was incorporated in 2003, and its core business areas are Real Estate, Private Equity and Structured Products. From looking through the portfolio of investments, the bulk seem to be real estate deals throughout Europe and the Middle East, with the private equity transactions predominantly confined to the Middle East.

David Haigh's comments above would indicate that IIB's investment in Leeds will be "long-term", "sustainable" and will provide the "finance and stability" to take the club forward. With particular focus on the "finance and stability" element, are IIB in a position to deliver this?  Looking at the Q4 2012 accounts ( provides some insight into the firm's financial stability and potentially also the ability to finance further investment in Leeds United.

Income Statement

If you strip out "gain on conversion of associate to investment at fair value through equity" (effectively a non-cash revaluation), we get to an operating loss of -$967,000 for 2012, an improvement on 2011's operating loss of -$2,565,000 but a loss nonetheless. Effectively we have a business whose core revenue (Investment Banking Fees) does not cover its Corporate and General and Administrative Expenses. This would indicate a business which is struggling to generate a profit through its core activities. Again however, it must be stated that this is an improvement from the position in 2011.

Balance Sheet
The balance sheet of IIB is in solid shape with limited debt putting pressure on the capital structure. It is unclear as to how their investments ($58.6m in total) are valued and whether this is hiding any losses, particularly on the real estate side.

For me the most troubling aspect of the business is their cashflow which shows a net cash decrease of $25,929,000 over the course of 2012 with a current cash balance of c. $35.5m. This is largely linked to investments made, but as can be seen from the income statement, the business is not generating cash and therefore its sustainability is down to support from outside sources (either investors through equity or debt).

This may be readily available, but it does raise a question mark over their ability to continue to sustain investment in their transactions and does to my mind create questions in terms of their ability to provide "finance and stability" to Leeds United.

With Warnock's comments indicating that GFH need to sell shares in order to fund investment in the club, and Haigh's comments above, this may be the first of many share sales in Leeds United. With the outcome of any proposed investment by Steve Parkin at the time of writing this uncertain, what would the implications of having a consortium with multiple investors, invested in Leeds United?

From personal experience, investment consortiums can be incredibly tricky to maintain and manage for anything but a medium term investment horizon and must generally be governed by a firm legal framework and stringent business plan.

For a business such as Leeds United, which requires investment and stabilisation, not to mention having to deal with the vagaries of the performance of a football team (whose performance can to a reasonable extent be governed by chance), it can be difficult to maintain a cohesive vision amongst all parties, especially when some/all of these parties who are investment banks and therefore might have different investment targets, hold periods and ability to fund further investment on an ongoing basis. As a Leeds fan, any attempt to stitch together a consortium of multiple parties of a similar ilk would particularly worry me, especially when it is unclear in terms of their ability to provide long-term sustainable investment into the club.

To my mind, the following is clear:
  1. Leeds United today is a club for sale and one which requires further investment. This breeds uncertainty and will make it difficult to attract both the manager or players required to mount a successful promotion bid.
  2. GFH need to sell down their stake (either fully or partially) over the short to medium term.
  3. Given how this season has turned out, and the need to attract a new manager with a proven track record to replace Neil Warnock, a sustainable consortium/pool of investors will need to be in place before the end of the season in order to maximise the opportunity of next season.
I still retain some faith that GFH will take the necessary steps to ensure that the club is put on a sustainable footing, and that much of the work they have done to date has improved things compared to the Bates era, however the uncertainty over the club's ownership is unsustainable with the investment of IIB doing little to improve the status quo. The longer it is allowed to drag on, the more damage will be done to our prospects for next season and even from GFH's perspective, this is surely untenable.