Or maybe not....
GFH - Q2 2013 Results and more ownership questions...
GFH released their 1st Half Year 2013 results today, and as ever for Leeds
fans, and those with a slight interest in the comings and goings of our parent
company, it posed a great deal of questions, particularly over our opaque
ownership.
Hisham Al Rayes, acting CEO of GFH, had the following to say:
"We continue to focus on the strengthening of the balance sheet and the
realignment of projects for successful exits, which is allowing us today to
establish the Bank's credit rating in the market. We believe that this will
also further enhance market confidence in the bank and allow for better
business making in the future."
He added: "Furthermore, during the quarter we focused on building platforms to
extract value from our existing assets. In this regard, we secured a number of
strategic investors alongside GFH in Leeds United FC.
"We also saw progress on a number of our development projects and expect to see
positive results later this year in particular in Bahrain and Tunis... We are
confident that a stronger future is ahead and are determined to deliver higher
returns for our investors and shareholders as we go forward."
First to the financial performance, looking at the income statement for H1
2013, we can see that there was a decrease in underlying profit compared to the
same period in 2012 (pre-ownership of Leeds). Profit from operations was $4.9m
vs. $5.7m which was largely driven by a decrease in "Other Income" of $12.2m.
Other Income is primarily a buy back of financing liabilities, recovery of
expenses and of impaired facilities, therefore items which aren't related to
the principal operations of the company. If we strip this out, the underlying
income (predominantly from management fees) has actually increased
significantly over the period, with management fees up from $1.6m to $5.2m.
The cashflow paints a slightly more challenging picture. If we strip out the
proceeds from issues of convertible murabaha (essentially debt) and proceeds
from treasury shares (equity raised), there was a cashflow shortfall of $20m
over H1 2013. This is nothing new for GFH which has continued to suffer from
cash burn at quite an alarming rate. They have always been able to refinance
their liabilities, however it does raise questions as to how the company could
support itself if creditors/investors stopped providing financing to GFH.
The most interesting aspect of the accounts relates to the reduction in assets
held-for-sale. As stated in the 2012 accounts:
"The Group has an active plan to sell its stake in LUFC Holdings Limited, and
accordingly, the asset and liabilities acquired were classified as
held-for-sale and presented in the consolidated statement of financial
position. Subsequent to the year end, the Group has commenced negotiations
relating to the sale of its stake in LUFC Holdings Limited."
This resulted in a net total of assets held for sale of $45.5m. Looking at the
H1 2013 balance sheet we can see that assets held for sale has actually
decreased to $22.2m. Whilst small stakes in Leeds City Holdings Limited (LCHL)
had been disposed of (see previous blog posts on IIBB), it doesn't account for
such a significant reduction in ownership. Turning to note 11 of the accounts,
GFH state that:
"During the period, based on placement of majority stake in LUFC to strategic
investors, the Group de-consolidated LUFC Holdings Company."
Whilst it had been GFH's stated aim to reduce its holding in Leeds United to a
minority stake in the short to medium-term, it had been thought that any sale
had not been completed. Looking at this there are 2 scenarios:
* GFH has sold a majority stake to a single investor
* GFH has sold down a majority stake to a fund which it manages and
which has numerous investors
The lack of announcements from GFH but the mention of strategic investors,
would suggest to me that the latter was more accurate. This also fits in with
GFH's business model as detailed here,
This would de-consolidate LCHL's accounts from GFH's (a nightmare from an
accounting perspective), and formalise the investment structure. It could also
suggest that the spike in management fees in H1 2013 related to the arrival of
new investors (previous reports such as this article detail how GFH's business
model relies on charging investors a "premium" in order to invest in projects).
So what does this all mean for Leeds fans? Well, the following:
* It would suggest that GFH have achieved their goal of selling down a
majority stake to investors, and deconsolidating their balance sheet from that
of LCHL's.
* The previously contradictory messages of long-term, sustainable
ownership and holding the asset for sale can be understood a bit better. GFH as
fund manager, and minority holder, will look to maximise value, and hold for
the medium term (unless of course they receive an offer for an early exit at a
reasonable profit).
* If it is a standard private equity fund structure, GFH as General
Partner (GP) will have overall control for managing the fund and will decide
and execute strategy at largely their own discretion. The other investors (or
Limited Partners) will have little/no control over the strategy, and therefore
one would hope that incidents such as investors' nephews being forced on our
youth squad should not be something to worry about in future.
* Financially, unless we have further investment, it is likely that we
will continue to work on a tight budget, hence the trailed messages on 2-3 year
promotion horizons and "sustainable investment". The promotion of Leeds United
will rely on the financial support of its fan base, and GFH managing to reduce
the profligacy of the Ken Bates era, essentially "bread and butter" private
equity (reduce overheads and increase turnover).The start made over the past
few months has been promising, and what is reassuring is that GFH have realised
that having a united and content fan base is the only way to ensure the
financial success of Leeds United. Having started this year as relatively
pessimistic, I am certainly more confident as to where the club is going. Time
will tell as to whether GFH can deliver on their well-polished rhetoric.
________________________________
From: Nicholas Armit <[email protected]>
To: leeds list <[email protected]>
Sent: Thursday, August 15, 2013 12:54 PM
Subject: [LU] Sold for scrap
http://www.theguardian.com/football/2013/aug/15/leeds-united-owner-gfh-offloads-shares
The Dubai-based investment firm that bought Leeds United in December sold more
than half of its 100% holding less than six months later, financial statements
show.
GFH Capital, a subsidiary of Bahraini Gulf Finance House, offloaded a 10% stake
to the Bahrain-based International Investment Bank earlier this year and its
second-quarter financial statement showed it had now sold a total of more than
half the shares.
The statement did not say who the buyer was, specifying only that it had made a
gain of $776,000 (£500,000) on the sale and was now deconsolidating Leeds
results from its own. GFH could not be reached for comment on Thursday.
The company paid £52m last year to buy Leeds from their previous owner Ken
Bates, who has since left the club.
The club's website lists shareholders of Grand Cayman-based LUFC Holding
Limited – owner of Leeds City Holdings Limited, which in turn owns the club –
as GFH Capital, International Investment Bank and Envest Limited. Envest is
owned by Salah Nooruddin, who replaced Bates as chairman, and his wife.
GFH, which had already booked a $10.4m profit on the Leeds deal in its 2012
financial statement, said in April it had offers from several investors for
stakes in the club.
The company has been forced into a number of debt restructurings as well as a
major overhaul of its business model since 2010 as it struggled in the
aftermath of the global financial crisis.
It made a profit of $4.2m in the first half of the year, its financial
statements showing that this was mainly possible because of a $52m gain from
converting a type of Islamic financing security into shares. On an operating
level, the group lost $13m, the cash flow statement shows, while the balance
sheet reports accumulated losses since establishment of $379m.
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