Questions About Birmingham City’s Financing…
When Bates “reoccupied” Leeds United in 2007, he employed all sorts of accounting “techniques” to effectively clear most of the club’s debts, such as a quick in-and-out of administration (I’m assured that’s not the correct technical term). This seemed wrong to non-business-minded peoples but, we were assured by knowing sports journalists – Jeff Powell in the Mail newspaper, I’m looking at you – it was “normal” business practice. As was, we were assured in 2005, business people borrowing millions to buy a club and paying the money back from club profits. Leveraged buy-outs, they’re called. They happen all the time in what we were again assured was the real world.
More recently, football journalists have got excited by the phrase “the existence of a material uncertainty which may cast significant doubt about the Group’s/Company’s ability to continue as a going concern” in club’s parent company accounts. The suggestion was impending doom. But, we were yet again assured, this was just accountants and auditors covering themselves against worst-case scenarios. Nothing to worry about. Normal business practice. Happens all the time. Experience has taught many football fans that this, to quote the great financial wizard George Gershwin, “ain’t necessarily so.” Sometimes, to use another phrase, “if it looks like an elephant, stomps like an elephant and smells like an elephant…it’s an elephant.” And if there is “material uncertainty” about the financial future of the company/club in question, that is because there is a material uncertainty…etc…
Birmingham City were the latest materially uncertain football club when I started typing this piece. Since then, Bristol City have become materially not sure… almost as if football generally is in an unseemly financial mess. Birmingham’s parent company, Birmingham International Holdings (BIH), recently published its accounts to the end of June 2010 – later than promised, but we’ll come to that in a bit. And these figures have that material uncertainty in its usual spot – the note to the accounts entitled “emphasis of matter.” But despite the best efforts of financial experts among City’s fan base and because of the lack of effort of the local press, the entire accounts appear materially uncertain.
The club (“BCFC”) is a wholly-owned subsidiary of BIH, which itself was the small-time Hong Kong company Grandtop International Holdings until BCFC arrived. Grandtop was a clothing company, described as “apparel sourcing and trading” in these accounts, and also provided the catch-all “entertainment and media services.” Quite how main a subsidiary BCFC is can be gleaned from two key facts. During the 15-month accounting period, only eight of which included BCFC, “consolidated turnover” rose from 11 million Hong Kong dollars (HK$) to… HK$582m – an increase, the accounts note matter-of-factly, of 5,356%. And of that HK$582m turnover, BCFC made HK$580m. The results themselves indicate that BCFC’s net loss was £400,000 from April 2009 to June 2010, seven of which were under charisma combo David Gold and ex-pornographer David Sullivan.
But the results themselves did not instigate the concerns raised by some Blues fans. These came from the delay in announcing those results. Not particularly the length of the delay, as that was only one week, from October 19th to October 26th. And the announcement of parent company financial results within four months of the financial year end would have made a lethal weapon out of a feather among some fan bases (hello, Hull City). It was more that the delay was announced some way into the last minute, October 20th, “at the request of the Hong Kong Stock Exchange” (HKSE) (on which BIH is listed); and that the delay, according to the announcement, was “due in part to an outstanding issue relating to the working capital requirement of its principal subsidiary” which, by HK$580m, was BCFC.
The announcement also claimed BIH’s directors weren’t over-worried: “As Mr Yeung Ka Shing, Carson, a director and substantial shareholder…has pledged to provide reasonable financing to (BCFC) if required the Board is of the view that this issue is not expected to have any material effect on the operations of that subsidiary.” How “substantial” Yeung’s shareholding is, we’ll come to in a bit. And the “issue” remains unspecified, although it is stressed in the next paragraph that “there are no negotiations or agreements relating to intended acquisitions or realisations.” At least, none which are “discloseable under…listing rules.” But the gist was that as long as Carson Yeung had pledged to cough up when needed, everything was OK.
However, this announcement came because of wild fluctuations in BIH’s share price, and came alongside the announcement of a “share placing” to provide “net proceeds for general working capital and financial support to the operation of (BCFC).” And perusal of various BIH announcements to Hong Kong’s stock exchange reveal a troubled time for the company, while also revealing Yeung’s investment in the football club to be as “substantial” as his shareholding. A share placing is defined as “a method of selling shares and other financial securities (which) are offered to sponsors or brokers private clients and/or a narrow group of investors.” In BIH’s case, it was specified that these shares would be placed with people who were NOT existing BIH shareholders. And the proposal helpfully demonstrated how current shareholders’ shareholdings would be diluted as a result – helpful because current shareholders’ shareholdings (or current shareholders themselves, for that matter) were not previously widely publicised.
It confirmed what many people suspected, however. That despite being the new ownership regime’s figurehead and, even now, routinely described as BCFC’s owner, Carson Yeung was merely one of many minor shareholders – two of which were named in the announcement. These were Zhou Xin, the CEO of “E-House China”, suggesting an e-communications background or, in keeping with his business history, property development and Lui Xingcheng, who increased his BIH shareholding from 13.14% to 14.22% on October 26th, buying his shares at HK$0.195, outside the share placing and fractionally more expensive. There was no indication in the stock market announcements as to who sold those shares. If all shares were placed, Yeung’s personal ownership would be down from 6% to 4% – “substantial” only in the weirdest of dictionaries. And he and his hopefully-entitled “Great Luck Management” company would together see their holdings diluted from 18.59% to 12.47% – one-EIGHTH of the company.
Other questions about Birmingham’s finances are not answered by the accounts and shares announcements. Indeed, they’ve posed a few more. The share placing, when publicised at all, has been presented as a “cash windfall” for Blues, with a possible £25m-£35m to be raised if all the shares are placed. £7m of the placing has been underwritten by the brokers of the deal, Kingston Securities Ltd. To add to the general uncertainty, the one local press article on the subject was headlined “£25m cash windfall for Birmingham City?” in the Birmingham Mail, but “£7m cash windfall…” in the Birmingham Post. It was the one article though, which quoted a stockbroker damning the whole thing with faint praise: “Provided that the get all the money in, (BCFC) is going to be relatively comfortable compared to some of its peers.”
Fans hoping for cash to improve the squad and fund the recently-suggested stadium improvements will therefore be disappointed. The accounts reveal that BIH’s current liabilities exceed it’s assets by a cool £28m, a gap which the share placing’s maximum net proceeds will, just about, plug. This fit of figures has been noted by other analysts. After that? A “material uncertainty,” even over whether the share placing will deliver the maximum financing. Some fans believe that Kingston Securities unwillingness to underwrite more than £7m is a sign of lack of confidence, as underwriting the whole amount would be a more lucrative exercise for any broker. This is despite the shares being an eye-catchingly cheap HK$0.19, lower than the lowest BIH share price of a turbulent summer and advertised in the announcement, somewhat desperately as “a 39.76% discount” on an average price over five consecutive, but turbulent, days. It is, of course, a minimal discount on the price Lui Xingcheng paid a week after the announcement.
The summer’s turbulence saw such wild fluctuations in share price that the HKSE wrote to BIH for an explanation. The company claimed it was “not aware of any reasons” for them, although the “large number of delays in producing required statutory documentation” (see below) has been cited by some observers. Also unexplained is why Yeung is so prepared to see his shareholding drop so low – and how he can still be the “sole decision-maker” others claim he is. He can afford more shares, having seemingly come into £290m over the summer. In the accounts BCFC was a “substantial acquisition.” But BIH’s May purchase of Diligent King Investments Limited “constituted a very substantial acquisition,” three times as substantial.
A high price, as one analyst noted, for a recently-incorporated company, with one asset, namely one “proposed agreement for a 20-year exclusive licence with China Broadcasting Telecommunications Ltd” – purpose unknown. A company with one careful owner… one Carson Yeung. The acquisition isn’t yet complete. In fact, BIH’s record at acquisition completion is a dismal one out of three, as witness by quarterly delays in “producing required statutory documentation” for both Diligent King and BIH’s other substantial recent acquisition, Peace International Creation. Peace’s “entire share capital“ acquisition was agreed a year ago. But last week BIH still required “additional time” and “the aforesaid acquisition is still in progress.”
So Yeung doesn’t have that cash just yet, although he clearly has plenty of some cash, given his preparedness to “provide reasonable financing… if required” to enable Birmingham City to continue as a going concern. One must hope, for the club’s sake, that he is better at providing that finance than BIH is at providing paperwork. Although I’m expecting reassurance from some quarter that such paperwork delays “happen every day in business.” Only one pattern seems to be emerging from Yeung’s motivations, that Birmingham City is the vehicle for promoting his other business interests. This is most obvious from the reference in the accounts to his “apparel” business, which is “facing a comprehensive challenge from apparel competitors” which meant the business “temporarily recorded no turnover in the period.” But only temporarily, as help is at hand from an agreement with “Xtep UK” on “the manufacturing and selling of ‘BCFC-Xtep’ branded sportswear” until 2015, a “crucial strategy… in redeveloping (re-starting) the apparel sourcing and trading business.” Lucky BCFC were on-hand, eh?
This might also explain Digital King’s future role…”live from St. Andrews” might soon be the Chinese equivalent of “now from Norwich, it’s the quiz of the week” (ask your parents), if the Premier League’s big clubs succeed in destroying the collective agreement on overseas broadcast rights (pure, PURE conjecture this, before anyone writes). But the idea that Yeung could be a mere face in a shareholders’ crowd has been passed off by commentators as “Eastern business practice.” And, with a depressing inevitability, BIH’s lack of transparency is because “the Chinese tend to be inscrutable by nature.”
“We forget,” said one Birmingham Mail reader, “that companies in Asia don’t behave like companies in the western world. Unless anyone is an expert in their ways, how can we be really sure what’s going on?” Indeed. Ask anyone whether Birmingham City are doing OK financially, and they’ll tell you they don’t know. Steven McManaman is a BIH executive director. You’re as well off asking him. This is the problem. And it isn’t a problem particular to Birmingham City FC at the moment – or Steve McManaman, to be fair. I am no financial genius or expert in “ways.” But nor am I stupid. And the financial affairs of a Premier League football club should certainly be clear to someone like me, if not every fan who takes an interest. If they are not, then they are not transparent enough. And if that is “normal business practice” which “happens all the time,” then normal business practice is wrong.
Follow Twohundredpercent on Twitter here.