LUFC Cash and Investment
It was revealed on Companies House today that Leeds United had allotted almost 9 million new shares in the Club which had brought in a revenue of almost £9 million.
Naturally, many fans have been asking what this means and why it has been done and until the club themselves explain we cannot be sure.
As with any Uk company, we only get to see the actual accounts around 9 months after the end of the season and so they are well out of date by the time we look at them. As fans, we need more up to date information if we are to be able to understand what is going on. Although we do not know what has happened financially I do feel able to make some predictions and estimates that update last year’s accounts.
Any Club’s management accounts have many different items which go to make up its annual accounts and these can be simplified down into just a few major headings. For this essay I’m going to just look at a few gross items and use rounded numbers for clarity.
Turnover
The club’s turnover in its last published accounts (season ending June 2017) was £34m made up of gate money, TV income and commercial activities.
Gate money was £10m last season but we’ve had a lot more people attending this season so this will have risen. I know a few people have thought that since our ticket prices are over £30 and we’ve had 23 home games of 30,000 attendance that this multiplies together to make a gate of £1m per game or £23m over the season. Unfortunately not all tickets are sold at over £30 each – season tickets are well below this value and then we have kids and aged discounted tickets at lower prices – and before the Club gets the ticket money as gate income we have to pay the HMRC the VAT element and the EFL also deducts a levy towards its own operating costs.
My estimate of gate money this season is £12 million in round numbers.
TV money hasn’t changed much this season but I understand that commercial income has been very good showing an increase of up to 25%.
Totalling all this and my estimate of Turnover for this season is around £40m.
Wages
When we turn to costs, the wage bill is the biggest single item and was almost £21m last season (including national insurance and pension costs etc). The club has said that the wage bill has risen this season by around £7m so I can estimate wages this season at around £28m.
Administration Expenses
There is a big chunk of spend under this heading and many fans think that it includes huge management fees and so forth. This is not the case as management fees have not been paid to owners and these admin expenses cover all the costs that the club incurs, some of which are quite hefty.
This category includes items such as costs to buy the items sold under catering and the cost of buying the products sold in the club shop, it includes the rent for Thorp Arch (ER is now rent free) and the rates for both places, the bill for heating and lighting, insurance policies, repairs to Elland road, hotel bills and travel to matches and training camps, costs of policing games, etc. etc. etc.
The admin expenses last season were £16.5m and this season I’m estimating a small increase to £18m on account of increased scouts, academy costs and so forth.
Amortisation and Depreciation
When we buy a player we have to pay in cash but often we can split the amount into two or more cash payments, with an initial payment at the same time as the change of the player’s registration and more cash later on. These payments are cashflow payments and are not what goes on the profit and loss account.
If we buy a player, say Chris Wood, for £3.3m the cost is obviously £3.3m. However, we get to use Chris Wood for more than one season so accountants say that if we give him a contract for 3 years the cost is actually £1.1m per season. This is what goes onto the profit and loss account each season and is called amortisation.
When we sold Chris for £15m after two seasons, the cost of buying him must be taken off to determine how much profit we made selling him. So £15m less £3.3m purchase is a profit of £11.7m. However, we’ve already had two seasons where we’ve charged £1.1m to the profit and loss account so we need to add this back in so we don’t charge it twice. Therefore £11.7m plus 2x£1.1m is a profit of £13.9m.
Similarly, when we buy something other than players for the club it will also be used for more than one season – simple things like computers are covered in this way. A laptop costing £900 should last for 3 years and so the cost is spread over 3 years at £300 per year. This is called depreciation.
When all the amortisation and depreciation are added together they cost us just under £7m last season and with all the changes to players etc. this season I’m estimating this is now over £12m.
Profit and Loss
Remember this is just my broad brush estimate of profit and loss but when the increased turnover has my increased costs deducted, profits and costs of player sales are included, then I think we will make a small pre-tax loss of around £2m.
Cash Flow
This loss of £2m doesn’t mean that the club has £2m less cash than it started with.
Remember that when buying players we only paid out the first payment in cash this season, so some more cash will be needed to be paid next season. Similarly when we sell a player we don’t get all the cash immediately and have to wait a few years before all the payments have been made.
These delays in making cash payments and receiving cash owed to us is hard to track and many companies go bust if they get it wrong. Sometimes we can be owed lots of cash next season but have no money in the bank right now to pay the wages and that’s why the club may need loans to keep it going until cash does come in.
Over a long period of time constant losses mean that cash is continually flowing out of the Club and new money needs to be injected via an owner or other financing source.
Leeds United has lost £32m in cash over the last four years with £10m going 4 years ago followed by £6m, then £10m and last season £6m. To keep us afloat Cellino had to inject new cash via equity and Radrizzani had to make a loan of £14.5m when he took over. These owner injections of money ensured that HMRC got their taxes and didn’t issue Winding Up Orders, wages were paid and we had enough money for the first payments on transfer fees for last summer. The club also used some of Radrizzani’s loan to pay off GFH.
My estimate for this season is that the club has had an outflow of cash of around £9m.
While this figure looks similar to last season’s there is not the same pressure for an owner to put extra money in this time because we are owed more money over the next couple of seasons, from player sales etc, than we were in previous seasons. However, it does show that we’ve used up any spare cash and don’t have loads lying around ready to be spent on first payments of transfer fees this summer.
Similarly, we went into last summer with a bank account stuffed full of money from season ticket purchases. This season many fans have said they are not renewing so the hoard of cash in the bank will be much less.
While we may have more money owed to us than normal, this will not last forever and come this time next season we could be in financial trouble unless either more money is invested or wages are cut.
Investment
As I’ve shown above cash has left the Club for the last four years and will do so again this season. We cannot continue to have cash leaving the club each season from normal trading without some method of that cash being replaced.
Put simply, we can only get that cash from increased sales of high value players or by owners injecting new equity in shares or making new loans.
New Shares Just Allotted 2nd May 2018
Companies House has released the filing that shows that Leeds United has allotted a further 8,834,908 shares at £1 each.
This could be from a number of different sources:
Why the funny number?
I’m always looking for reasons why whole numbers are not used since they often give a clue as to what is going on. Why 8,834,908 shares and not a round 9,000,000?
My first thought was it might be because £8,834,908 is pretty close to exactly a round $12,000,000 at current exchange rates. However, it would be rather odd for Radrizzani to be mixing dollars and sterling together since he is already installed at the club and has loans in sterling.
However, it would make sense for dollars to be used if this was a precursor to another deal that was being priced in dollars by a new investor.
The Club had 24m shares all owned by Radrizzani and he paid about £45m to buy the club so he valued it on purchase at about £2 per share.
Since then he’s paid off GFH and the holding company controls Elland Road so no rent is paid, he’s increased the squad size and their book value (don’t @ me!), he’s improved the Academy and made repairs to Elland Road, etc. The Club’s profitability has also improved, albeit helped by player sales, and it has basically broken even for two seasons now.
When all these changes are taken into account I’d imagine he values the Club at much more than £45m and possibly thinks in terms of it being worth up to £100m now and more with new investment.
If another investor is willing to join us then I’d imagine that Radrizzani would give up as small a percentage as possible and would want a price per share that values the club at, say, £110m including the new investment.
When Radrizzani bought the club he paid £2 per share and so I’d expect a new investor to pay at least £2 per share. However, since the Club could be currently worth up to £110m, from an investor point of view, he may pay £2.50, £2.75 or even an outside £3 per share.
If a new investor normally deals in dollars then we need to convert these sterling figures into dollars.
The club value is $150m after new investment and lets say the investor has $15m. This would give the investor 10% of the club’s shares by value and would be acceptable to Radrizzani. Converting $15m dollars into sterling and setting each share price at £3 means the new investor gets 3,648,323 shares.
Now these 3,648,323 shares are supposed to represent 10% of the total club shares so the total club shares needs to be 36,483,231 shares. However, before today’s new shares were allotted there were only 24m shares in existence so the extra shares needed to be created and allotted to Radizzani for him to maintain his 90% shareholding. Taking 24m and 3,648,323 from 36,483,231 equals 8,834,908 shares.
This is the “funny” number of shares allotted on the 2nd May and makes perfect sense to me when viewed as a dollar transaction.
How much would this cost a New Investor?
It looks like a new investor would be paying $15m USD which will give the club funds of almost £11m.
Who gets the money?
Since these are shares in the Club being issued by the Club directly to Radrizzani and a new investor then all the money comes to the Club.
Summary
The Club website still has Andrea Radrizzani as 100% owner of the Club and therefore owns all the shares so I think it is likely that the new shares allotted on 2nd May 2018 have been bought by him.
I can’t tell from anything published yet whether he bought them with cash or converted part of his existing loan with the Club into the shares.
The odd number of shares allotted is ringing bells saying this is not a finished deal yet and more shares are likely to be allotted some time into the future.
Given that Andrea Radrizzani doesn’t want to give up much control I’d expect the new future shares to be a low percentage; 10% is probably the lowest amount that would make sense to an investor and I’d expect that to cost about £11m.
However, it may be that Radrizzani does give up a larger percentage of, say 20%, with an associated revenue to the club of just over £21m.
Mike Thornton 10th May 2018