Sale and Leaseback: Good or Bad?
It seems St Andrews is now owned by another BSH company and not the football club. But even this simple statement is shrouded with doubt and queries that are outlined in our post titled St Andrews Ownership
However, assuming the sale of St Andrews has happened – is this a good thing? Well it depends on your point of view, your priorities and the detail of the deal. What follows is a bit technical but read on if you want some information to help you make your own mind up.
Often a business will see the possibility of sale and leaseback deal as a contingency to resolve a cash flow emergency (when a loan/increasing borrowing is not possible) or a way of creating extra short term cash flow for an investment that will improve profitability. If the cash freed up is used to settle liabilities or invested in a way that increases income (or reduces debt payments) that is higher than the lease payment – wise decision for the long term. If income is not increased or increased by less than the lease payment – poor decision for the long term and can be seen as just putting off the inevitable insolvency. Hence from a business point of view sometimes a good thing sometimes a bad thing – for it to be good it requires successful planning and delivery of a long term financial/business plan.
The position at Blues
This is not so simple, it is complicated because it is not about generating cash per se but about making the accounts of one subsidiary company, the football club, better. The other subsidiary company, the stadium owner, is not governed by the EFL rules so does not need to worry that its accounts are not so good. The holding company (BSH) does not really care which company holds the assets and where profit and loss is made within its subsidiaries because all the subsidiary companies accounts are grouped together for the BSH accounts and so will be the same regardless of moving profits and assets around its subsidiaries
It is fairly obvious that having a set of accounts that comply with EFL profit and sustainability regulations is imperative to avoid sanctions and points deductions. The sale can be seen as an accounting exercise that achieves the goal of having compliant accounts for year ended June 2019, The current EFL rules do not preclude ground sale and leaseback but EFL will get involved if they think the valuation of the ground is inflated or if the timing of the transaction is suspected to be outside the period of time the accounts cover.
Therefore, if you are sat in the football club board room with a set of accounts that would not be compliant, and you can make them compliant, it seems a no brainer to carry out this accounting exercise to bring the accounts into compliance and avoid sanction by the EFL. This then is a good thing and in the interests of the club. True in that moment, however it is a short term, once only solution to what may be an ongoing business issue.
This simple paper exercise has longer term consequences to be taken into account. It sets up a liability for the football club to pay the annual lease amount (rumoured to be £1.25M) out of the club accounts for the next 25 years. This is fine if the business can create the extra income each year to cover these amounts. In a loss making situation where the rules say the loss cannot exceed £13M per annum, the effect in future years is that the maximum loss on normal business before breaking the rules is £11.75M. That is, there is greater restriction on the finances for the next 25 years. This could still be a good thing, a price worth paying for averting a crisis, so long as the business profitability improves significantly in the next few years.
It should be noted that the business profitability also needs to improve significantly to be in a position to clear the holding company (BSH) loans. This is a lot of business/ profitability improvement (maybe only achievable through promotion to the premier league). If this business transformation is achieved – GOOD, if the business transformation is not achieved then the club is overstretched financially and facing insolvency – VERY BAD.
Whilst BSH supports its subsidiaries, covering the losses until the business transformation is achieved then having St Andrews in a different company should not be an issue. However if the losses become unsustainable and/or BSH wants to recoup its investment, then selling the companies separately is a possibility leaving a football club without a ground. Selling the ground on to an outside party is also easier now it is separate from the club or BSH could sell the club and keep the income generating stadium company. All risks that are BAD from the football club long term perspective. (clubs like Coventry City and Charlton Athletic demonstrate this risk can become a reality)
Insolvency of the football club is more likely because it has lost its property asset that can be used as security in difficult times and now has an extra long term financial (lease) liability – BAD. Also any acquisition of the football club by new owners has had another level of complexity added to what would already be complex deal.
Making your mind up
If you have managed to get through this ramble, then it may help you make up your own mind whether the sale of St Andrews is a good or a bad thing. For it to be a good thing then we need exceptional board level development of the business that builds on successes, plans for the long term and brings all elements of the club together to pull in the same direction. Unfortunately, the current BCFC directors have already shown by their past decisions they are not experienced enough to be capable of delivering this.
The sale and leaseback agreement may or may not be written in a way that favours and protects the football club. It could have clauses that revert the ownership back to the club if certain events happen – such as administration, particular financial triggers or change in ownership or clauses that restrict the new owner to only act in the best interests of BCFC.
If the BCFC directors had been open/ consulted with fans last May, when Blues Trust raised the issue with them and requested meetings to discuss the issue, then fans concerns could have been addressed within the sale and leaseback contract. Leaving fans contented that the sale of St Andrews was necessary, had safeguards for the football club and it would not have been a surprise to be concerned about. In short, major issues affecting the club need good communication and sometimes consultation – not secrecy that creates suspicion as to competency and motives.
Blues Trust has regularly requested the directors at BCFC to discuss how Structured Dialogue and meaningful fan engagement can be good for the club and avoid conflict with its stakeholders – the fanbase. The offer remains open.