UPDATE: Since publishing this article this morning, we have received some new information and updated it accordingly. Please click to read the new information.
The most interesting part of Leeds United’s 2010/11 financial returns, which have become available today, fall after the end of the accounting period. The filings take the assorted companies that make up Leeds City Holdings to the end of June 2011, but at the bottom of the very last page, is this:
‘Post Balance Sheet Events’: Leeds United Football Club Limited entered into an agreement whereby it sold season tickets for both the 2012/13 and 2013/14 season for a sum of £5,000,000 after the year end.
This, it seems, is the £5m facility that was referred to in the official sites reporting of the account headlines: “After the year end we entered into an agreement for a £5,000,000 facility to part fund the East Stand Development.”
The full meaning of this note is not made clear, but Phil Hay of the Yorkshire Evening Post has sought clarification from the club and posted on Twitter:
I’ve spoken to #lufc who’ve confirmed that a portion of cash raised from 2012/13 + 2013/14 season ticket sales will pay off East Stand loan
The repayments will use “some” season-ticket cash for those 2 years, not all of it. #lufc say East Stand work is “prudent” for club’s future
The situation seems to be that part – we don’t know exactly how much – of season ticket revenue for next season and the season after, which would in total be worth approximately £10m, has been sold to an unknown party for £5m. The further point of interest here is that this was done to pay off an “East Stand loan.” Who this loan was with, or why it had to be paid back in this manner, isn’t clear.
This afternoon we received a new document – available to view here – which shows that the 32 preferential shares in this issue were purchased for £100,000 each, not the £1 each we originally reported. To be clear, the 32 shares have been purchased for £3.2m, and have a guaranteed value of £4m.
We have updated the post below to reflect this, and also pulled the related article from the new issue of our magazine, as there was no time to edit it before our print deadline.
We wholeheartedly apologise for any confusion, and assure you that we were acting in good faith based on the information we had.
Although the terms of this share issue are different from what we originally understood, our new understanding still raises a number of valid, if different, questions.
The new information makes the second option described below seem the far more likely explanation: that these shares have been issued as an alternative form of loan, with the difference that as a share issue, it does not show on the accounts as debt.
The £4m return on £3.2m investment represents a guaranteed 25% return for whoever owns these shares, and the question remains: why has the club taken out what is effectively a loan at 25% interest, and what is this £3.2m for?
Here follows the corrected version of our article:
This is not the only worrying event to have taken place since June 2011. A document we found at Companies House shows that the share capital of Leeds United, which has stood at £500,000 since administration in 2007, increased to £500,032 in December 2011. The document reveals that 32 ‘Preferential Shares’ were issued in Leeds United in December in return for an investment of £3.2m. These shares are held by persons unknown, and when redeemed, will be worth £4m.
That £4m is guaranteed – each of the 32 £100,000 shares is worth a locked-in £125,000 when sold. There are three ‘triggers’ which would allow their sale:
- a change of ownership of the club or holding company;
- liquidation of the club, in which case the ‘Preferential Shareholders’ would have to be paid £4m before the ‘ordinary shareholders’ saw a penny;
- if the major shareholder decides to buy back the shares. At Leeds United, via Leeds City Holdings, Forward Sports Fund and Outro, the major shareholder is Ken Bates.
‘Preferential shares’ are normally issued for one of two reasons:
- existing shareholders can use them to ‘lock in’ a guaranteed payment should a business be sold or liquidated
- as an alternative form of loan, with no repayments and so no impact on cashflow, and a predefined repayment value. Oddly for a lender, however, there is no fixed date given for repayment – they only stand to receive £4m if the club is sold, liquidated, or when Ken Bates decides.
Who is the beneficiary of this £4m return for £3.2m investment is not known, nor is it known why these shares have been issued. In the full article in the magazine, we wondered if this issue might relate to the East Stand “facility”, but this morning’s news suggests the two are completely separate.
The post-accounts situation, therefore, seems to be that part of the club’s season ticket revenue for next season and the season after has been sold for £5m to persons unknown, to pay off a loan from persons unknown for work on the East Stand. Meanwhile, £3.2m has been invested in Leeds United by persons unknown, in return for ‘Preferential Shares’ which guarantee these persons unknown £4m should the club be sold, liquidated, or should Ken Bates decide to buy the shares back. The financial fog remains as thick as ever at Elland Road.
As the accounts have only become available this morning, there has not been time to properly analyse the actual results for the year ending June 2011. But at first glance, the club spent a lot of cash during the 10/11 accounting period:
- £4.8m spent on the East Stand development
- £2.7m lent to the separate Pavilion company
- £255k lent to the separate Leeds United Media company
Amidst all this spending, Outro Ltd – the company through which Ken Bates owns FSF, LCH, and therefore LUFC, lent the club £975k to keep it cash positive. The accounts note that this amount was repaid after the year end.