Cellino offered to sell to Leeds Fans United last week. Phil Hay spoke to LFU chief executive Dylan Thwaites to ask how the deal would work.
What is the situation with exclusivity? Do you have it or are you close to getting it?
DT: The simple situation is that we got verbal exclusivity when Massimo said he only wanted to sell to Leeds fans. We told him we wanted to bring in third parties who we’ve talked to about funding us in buying a minority stake but he said he only wanted to sell to Leeds fans. Verbally, we take that as exclusivity. I think that’s reasonable. But we know as professionals that we can’t start spending our shareholders money until we’ve got legally-binding exclusivity. The first step with Massimo’s lawyers is ‘let’s get the exclusivity signed’ and then the very next morning we can start due diligence.
When will those discussions take place?
DT: They’re ongoing. I talked to Massimo (on Monday) night and I’ll meet with his lawyers (today). We’re literally waiting for that letter of exclusivity and then we can get going.
Would you expect to get exclusivity immediately?
DT: I’d hoped to have it before we did this round of interviews but we need to have it before we press any more buttons. We’ve come as far as we can until we have that. I think they understand that. It’s just a question of making sure it’s delivered now.
If they’re obstructive, if they won’t provide exclusivity, what is your next move or what would be your reaction?
DT: If they specifically say that they no longer intend to give exclusivity then we can’t go forward with a majority purchase. It’s too much of a risk. We’d revert to our position of partnering with other companies who are interested in buying into Leeds. That’s an entirely viable option for us. That’s what we were set up to do. But buying the whole shareholding offers advantages. The minority stake would then be partnered with a majority stake which is held by Leeds fans, not a third party. What we’re showing is that we’re absolutely able to go in either direction. At the moment we’re working on the basis of what we’ve been given - which is that Massimo wants to sell his shares only to Leeds fans.
Do you believe him when he says that?
DT: The proof is going to be in the pudding of getting written exclusivity. He did talk about the fact he wanted to only sell to Leeds fans to enough people. We’re not imagining it. There’s no reason not to give us it. In a normal business relationship you would have exclusivity before you started this process so it would be perfectly normal for us to get this.
Is there a deadline for securing exclusivity in your eyes?
DT: We’re not going to put any lines in the sand. He’s under a great degree of urgency to move this process quickly. We’re in a position to move immediately. The moment we get exclusivity, we’re ready to move. But it doesn’t do anything for us by putting lines in the sand. He either wants to do this deal with Leeds fans and only Leeds fans or he doesn’t - in which case we can revert really smoothly to the partners we’re already talking to. There are many of them and they’re all very capable.
If Massimo Cellino was to ask for proof of funds - as tends to be standard practice - before giving exclusivity, would you be able to provide that?
DT: We would need a little bit of time to put that in place. The funds aren’t there but there are institutional people who could underwrite it and therefore show proof of funds. The difficulty is that until we’ve done due diligence we don’t know precisely how much funds we’re trying to prove. We know that we’d be buying at cost. We know that’s at least £30m but we don’t know how far it is ahead of that.
Has he named a price, then, or have have you specifically asked him to?
DT: No. I don’t think we need to do that. We don’t even need to do that when we’re in due diligence. The price is a fixed price. It’s the cost that he’s come in at. That’s an auditable figure, it’s a specific figure, it’s very specific. We can see that he’s put £30m of equity in at Companies House. We can’t see anything else ahead of that yet. But we believe there’ll be other stuff. That’s auditable and it’ll come out during due diligence. That then gives us the maximum price we’d be paying.
You mean £30m, plus whatever else you find?
There’s no question that £30m is a serious sum of money. Do you have that cash or access to it?
DT: We don’t have that cash because we’ve not started the full fundraising. But the fundraising is in four parts. The primary part is the Community Benefit Scheme (CBS) which is 99 per cent of Leeds fans and the part where over 2,000 people have put at least £100 in. That’s the part that would hold the power, the heritage and the legacy issues for Leeds - things like the club not being able to be moved, or the name changed or the kit colour changed. If we go ahead with a majority deal, the majority owners would be Leeds fans so we’d be able to give the CBS far more power, such as financial probity and the idea that we’re run in a sensible way. If we’re able to go for a majority, the power of the average fan is increased because they’ll be in partnership with Leeds Fans United (LFU). That’s the second phase. LFU would then own the remaining 90 per cent of our shareholding. LFU would be made up of maybe a dozen, probably slightly more, high-net worth Leeds fans, each investing anywhere from £100,000 up into the millions. We probably wouldn’t want anyone to have more than a third of our shares because it’s not meant to be a vehicle for an individual. It’s a vehicle for fans as a whole.
This is going to take serious individual backing though, isn’t it?
DT: Yes but we’ve already identified about 70 or 80 people who are interested, at least, at this level of investment. Clearly we won’t deliver that many but we think we can deliver a dozen or so from that.
So essentially, that’s what’s needed - 12 people making sizeable commitments - to hit the asking price?
DT: The way we’ve structured this is that the more we get, the better. If we can get all of our funding this way and find 12 people with £5m each then we’re fine and dandy and we’ve got working capital moving forward there and then. But the likelihood is that we’ll still have a funding gap at that stage. This is where we start to look at debt. It’s an issue we’ve got to be very aware of at Leeds but the debt we’d be taking on, the first form of it, would be debt from Leeds fans - high net worth, wealthy Leeds fans - would would lend £1m interest free but get a premium paid when we get promoted back to the Premier League. So say they get £1.5m back when that happens. The figures we need to work on and understand fully but that would work extremely well for freeing up cash flow. It would also put any debt back to a time when it would be much, much easier to pay.
Do you feel like this money is already there, in the sense that it’s already pledged? Or is it more promises that you’re now going to have to follow up and hope people actually deliver on?
DT: In the first round, when we launched this, most high net worth people wanted to wait until they could see the product and see what we were actually trying to buy. What we’re doing now is offering a number of products - the chance to be an equity stakeholder and the chance to put money in which would earn a substantial premium when we get promoted back to the Premier League. That’s very positively viewed by a lot of the community. It’s almost paying yourself a reward for helping the club to get back there. If we get back to the Premier League in the next 15 years even, the return is probably better than what you’d get from the banks.
Is bank lending an option? Because it would concern some supporters if they thought you were going down that route.
DT: We’ve got that as the fourth part, the final option. Institutional funding that would fill any gap after the other three parts have been expended. It needs to be a flexible amount but because Massimo is saying he’ll sell at cost, we don’t envisage it being a difficult amount. Certainly we’d expect interest payments to substantially decline under the new structure. Institutional funding is there as an option and it also helps with proof of funds. We can’t prove funds until we raise funds. We can’t raise funds until we’re in the process so you need to have an underwriter who can underwrite that gap in the meantime. That’s where we’d have to involve institutions. Ultimately, the gap might not be there and institutional funding might not be needed but equally, the gap might be a few million pounds. That would need to be covered.
Have you approached those institutions or secured commitments from them?
DT: To be fair, in the few days we’ve had to look at this - and two of them were Saturday and Sunday - we’ve not sat down with them yet. It’s not the highest priority part. We’re very comfortable that because the quantum is not enormous, because we can see where we’re raising the other money, it’s a comfortable investment to do. Previously we’ve been approached with an offer - albeit dependant on detail - from a global investment bank that was prepared to run to a loan of about £120m. We’re talking about fractions of that so I don’t think this is a big issue.
On the subject of due diligence - people familiar with this process think you’d be looking at a cost of six figures to do it. Would that be a fair estimate?
DT: For something like this it would be normal to spend £400,000 to £500,000 on due diligence. Hence the reason why we won’t progress until we’ve got exclusivity. Who would? The good news for us that we’re so full of lawyers, accountants and business owners in our network, we actually think the bulk of due diligence can be undertaken internally. These are people who do that and know what they’re doing. They’d be doing it pro bono (free of charge or at a reduced cost). That’s really helpful.
Could it come in below £500,000 then?
DT: For us it will come in much cheaper because we’ll get the bulk of it done pro bono.
The risk with due diligence is that you do it and then find problems which mean you can’t proceed with a takeover. The money spent is then gone. Do you have the support of the fans who’ve put the cash in to take that risk?
DT: We’ve got a clear position where we can only use 10 per cent of the money that’s been raised. That’s very clear. But because we’re doing the vast bulk, and certainly all of the initial due diligence internally, that’s not a problem for us to be worried about. You’re quite right - if due diligence picks up things which means the value (of the club) is lower than even the at-cost figure then we would walk away. The at-cost figure is the maximum figure because if the cost is less than that, we wouldn’t be paying the at-cost figure. We’d walk away or pay the value.
If, then, you valued the club at £30m and Massimo Cellino said ‘actually, I’d like £35m’, you wouldn’t be interested?
DT: That’s not the agreement we’ve got with Massimo. That’s not the basis of the agreement. The agreement is at cost. That means there’s no negotiation above that maximum figure because the maximum figure is purely auditable. If he can demonstrate that he’s put money in and it’s not been taken out then fine, that’s what’s gone in.
Future funding, from the point of view of cash that needs to go in, is an issue. To be fair to him, he has put money into the club at times when it was needed. Have you planned for that at this stage?
DT: Yes. We’ve got a broad plan in place which we’re comfortable with. The broad plan is that there are immediate cash flow savings we can implement - things like the acquisition of Elland Road. We can acquire it for £20m and at the moment we’re paying £2m a year on rent. We could fund that with yet another scheme where wealthy fans and people could offer a five per cent bond. Straight away, there’s money that’s back in the club. It’s a simple thing to do and we own Elland Road. So it’s win-win. But all fan-owned clubs have shown an increase in season ticket sales, merchandising, the commercial side. From a Leeds point of view, sponsorship - not least, £500,000 or more from putting someone on the shirts. It is true that it’s difficult to get sponsors when they can see that the fans of the club are so disgruntled. Sponsors don’t want to be associated with disgruntled people. So we’d expect revenues to increase, and attendances. Corporate hospitality has also dwindled a lot over time. That all immediately helps with cash flow. We do think we can operate a football club better than it’s been operated in the past. We’re bringing skill sets of running business of this size, turning around businesses of this size and making them successful. Just because it’s a football scenario doesn’t make it more difficult to run but we would obviously recruit a management team, people with football administration experience. We need that expertise. But a club of Leeds United’s size should not be struggling in the Championship, it really shouldn’t. On top of that, Massimo was insistent that we couldn’t bring in the third parties we’ve been working with for this takeover. The answer from him was no. So once we’ve got the club, we can look at bringing these third parties in. The benefit is that instead of that money going to an owner, the money goes into the club because the majority shareholder won’t be looking to exit the club.
If you are able to do this, how long will it take to complete? Because if you do have exclusivity. there’s a period in which only you can try to buy the club - and if you fail to do it, that’s a period in which the club is going to drift?
DT: We could do the minority stake purchase in five weeks. The majority part of it would probably take about three months. But with these things you caveat it because it depends what comes up in due diligence. That’s the kind of timeframe and the clock starts from the moment we get the exclusivity letter.
On the subject of GFH, the bank has made no comment about whether it would be willing to deal with you or sell its minority stake to you. How does that affect you?
DT: They have no power. We believe, although we can’t be sure until they do due diligence, that they could drag along with Massimo in this. The price we agree with Massimo, they could agree to as well.
In the sense that GFH can insist that you buy its shares at the same value?
DT: Yes. We think it’s unlikely. We’d be fine with it and we’d then own 100 per cent but my gut feeling is that they wouldn’t want to go ahead with that. It would be a substantial reduction in the value that they’ve told their shareholders they’ve got in Leeds United. We can handle it if they do. If not, they’re a silent partner. It doesn’t really affect us. If we came to increase equity in the club, they’d have to put their hand in their pocket or dilute.
Is there a point now at which you need due diligence to be starting?
DT: Really, the time pressure is on Massimo rather than us. If he doesn’t win his appeal (against Football League disqualification), there’s going to be an interesting period where there’s a danger of the club heading more in the direction of relegation which devalues the business and makes it less likely that he can achieve even the at-cost figure. It seems to us like we don’t need to put ourselves under time pressure. We’re ready to go. he just needs to give us exclusivity. If he wants to delay for whatever reason, that’s his prerogative. In a way, we’ll find out the veracity of what he said - whether he really meant that he’d only sell to Leeds fans.
There are undoubtedly fans out there who think this is a bad idea or doubt that it can work. What would you say to them that would convince them that this is better than holding out for somebody rich to buy the club?
DT: All the supporters clubs have come out in support of what we’re doing. They can see and they recognise that we’re proper Leeds fans who are doing this with the right reasons at heart. I think it’s a very Yorkshire trait to fend for yourself and not to whinge and moan and think that someone will come and rescue us if we cry about it enough. That’s why whenever anyone puts an online poll up, we seem to get 90, 95 per cent support. I think that plays to our Yorkshireness - why wait for a white knight? We’ve waited 12 years. It hasn’t happened so we can sort this out ourselves. We’re ready to get on with it. Let’s get on with it.