Eleonora Sport Accounts 2017

Eleonora Sport Accounts to June 2017

This is just a quick look at the Eleonora Sport accounts to clear up some of the speculation that surrounded the sale of Leeds United to Mr Radrizzani.

There is a not a great deal of information relevant to today to be gleaned from these accounts so I’ll try and keep it brief: However there does seem to be some confusion about “Note 17” which is easily mistaken as profits that Eleonora Sport will make from future cash receipts; there is also a reference to “present day value” in Note 17 which is a term many people will not have come across.

Sale Price
The accounts are clear that they sold the club for £45m (more precisely stated later as £44,757,193 which accounts for currency differences). Closer inspection of the accounts indicates a likelihood that this sale price was not paid up in cash immediately but has been paid in two installments of £36.5m with £8.5m held back to be paid in annual installments up until August 2026.

In financial terms this gives a “headline” sales price of £45m but it is realistically worth less to ESL because it doesn’t get the money immediately.

This “write down” of value is often hard to understand and is known as “Present Day Value” of an income stream. I’ll try and explain more about Present Day Value (PDV) later but the net effect is that the sales price is better expressed as £2.5m less at £42.5m. This lower price has implications for the profit that ESL make and the tax that they will pay

Profit On Sale
Eleonora Sport (ESL) made a paper profit on sale of Leeds United shares of £3.5 million – this is simply the profit that the two 50% sale transactions brought about and is the difference between the cost ESL incurred in buying the shares and the sales price they achieved on sale.

But matters are a little more complicated than that. As I’ve said above the present day value of the sale was only £42.5m and so the present day value of the profit is also lower at around £900,000 rather than the £3.5m on first look.

Why do accountants use present day values? To put it simply, when a payment is not going to be received for some time its true value is eroded due to inflation. This means that year by year the £3.5m headline profit gets eroded too.

If ESL were charged full tax immediately on the full £3.5m profit they would then get back a tax refund each year to reflect the erosion in the profit due to inflation – this repetitive practice is wasteful of money and resources at HMRC so accounts will work out what the effect will be and tax is paid on that final effect just once.

Closer inspection
ESL had running costs during their time in operation – they themselves had to borrow money to fund Leeds United and had various expenses in keeping the company going. They also charged Leeds United management fees (note – LUFC isn’t specifically mentioned as the company they charged management fees to so that is an assumption on my part) and received interest on cash they held at the bank.

When ESL’s losses in previous years are combined with the profit made selling the club and accounting for the erosion of future values the overall profit ESL achieved in their time as Leeds United owners was just over a million at £1.2 million.

I must stress that although it is clear that ESL are owed £8.5m which will be paid in installments up to 2026 (ie just under a million pounds each year over the next nine years) there is no statement saying who it is that owes ESL this debt. From looking at ESL accounts and the details of their trading it seems likely to me that this money relates to money held back as part of the sale of the club. I can see no other trading that ESL have undertaken that would give rise to such a debt but I may be wrong.

Management Fees
The ESL accounts state that they charged a Uk company just over half a million pounds in management fees during July 2016 to June 2017. Again, there is no indication in the accounts as to who exactly was charged these fees but it is reasonable to assume it was Leeds United or a related subsidiary of ESL.

These fees for services rendered of £515,000 are income that ESL got during the year and have contributed to the overall profit of £1.2m I mentioned earlier. These fees are on top of any profit from the sale of the club but are included in my overall profit figure for ESL so shouldn’t be added on again.

In brief:
– ESL spent £41.5m buying Leeds United shares;
– ESL got £36.5m as immediate payment selling the shares;
– ESL will get an annual payment of almost £1m per annum for the next nine years as residual payment for the shares;
– The profit ESL has made from the sale was £3.5m headline, reduced to present day value of £1m;
– ESL charged Leeds United £515,000 in management fees.

Present Day Value
Present Day Value (PDV) of a debt is often confusing. It basically means that if you are owed money but you don’t get the money until after inflation has increased living costs then the money is worth less than you thought originally.

Say you have £1,000 spare and have decided to buy a holiday with the money but I ask you to lend it to me; if I pay you back next year we both might feel you are back at square one – BUT when you come to buy your holiday next year you find that hotel room rates have increased, flights are more expensive and the fuel surcharge has gone up so you need £1,100 to buy your holiday.

Clearly although you got your money back your buying power has decreased.

This is effectively what accountants mean by present day value – £1,000 today needs to be £1,100 next year to be EQUIVALENT.

Accountants reverse the wording and say the £1,100 next year is equivalent to only £1,000 today (they actually use estimates of interest rates as well as inflation rates to come up with a percentage annual rate).

In this way, ESL getting £1m as final payment in 2026 will not be able to buy a house that costs £1m today with that money – in 2026 it will only buy a house that today is selling for £500,000 for instance. Thus the Present Day Value of £1m received in 2026 is £500,000.

In the case of ESL selling Leeds United the £8.5m staged payments have a calculated present day value of just less than £6m.

This is all calculated and put into the accounts now for tax purposes. ALL normal real profit is accounted for in these accounts – there is no extra real profit later when the cash is actually received. In other words, the book value of the profit is £3.5m and will always be £3.5m even as the later £8.5m cash comes in.

Mike Thornton 26th February 2018