Leicester Tigers’ Finances – What is Going on?

The news this week that Leicester Tigers’ Chairman Peter Tom and Non-Executive Director Tom Scott were investing £13m of their own money into the club, was seen as a welcome show of support to the club. What was less obvious on first viewing was the reason why this was being done – was it to fill in gaps and keep the club afloat or was it new investment to expand and grow the club? It has now become clearer that it is more the former. So what is going on at Leicester Tigers and should fans be worried?

Background

Firstly, lets look at the latest set of accounts posted by Tigers back in November. The club posted an Operating Loss of £1.9m. Whilst a vast improvement compared to the previous year’s figure of £5.9m, it is still a long way from the club being a profitable venture. It means that a return to profit will be a long and tough journey and will not come over night. However, the Annual Report contained in the accounts talked of a long-term plan to return the club to a sustainable future.

Clearly in the three months since those accounts were released, the club has faced extra challenges on and off the field, which has had an impact on their financial position. As a result, Tom Scott is looking to inject £10m of personal funds, with Peter Tom investing £3m of his own money into the club – both via a round of equity fund raising. (The creation and purchase of new shares in Leicester Football Club PLC). Tigers would receive £8.3 initially - £5m from Scott and £3m from Tom, with a further £4.7m being made available to be called upon, if required, from June 2023 onwards.

The result of this investment would see Tom Scott’s shareholding increase from its current level of 45.32% to 59.25% initially, then 71.42% if the further amount is called upon. Peter Tom’s position would increase from 8.6% to 29.30% initially, then fall back down to 20.55% if the further £4.7m in shares is called upon.

Next Steps

A further consequence of this increase in shareholding is that under the Takeover Code for a PLC, Scott would be obligated to make an offer to buy the rest of the outstanding shares in the company. Scott does not wish to do so, therefore a waiver is required and has been issued as part of this investment offer.

As Leicester are a Public Limited Company, this investment offer has to be voted for approval by the other shareholders of the business. As such, a Notice of General Meeting has been called for Friday 3rd March for this to be approved. However there are consequences for the shareholders not approving this new funding for the club. In the circular that the club has issued alongside this announcement, the club states that if not approved, the consequence could mean having to appoint administrators, if no urgent Alternative Funding is found. It is in this paragraph of the letter issued, does the stark picture the club finds itself in is revealed. But what has happened to cause this?

Why is this funding needed?

The club funds itself via several different methods. Firstly, through the normal course of business – matchday ticket sales and associated income, merchandise and retail sales as well as sponsorship incomes. The club also use a number external funding facilities such as their £4m HSBC bank overdraft, their £7.1m HSBC bank loan, a DCMS loan of £6.9m, alongside an existing loan facility of £6m from both Tom Scott and Peter Tom. This is currently undrawn and will be withdrawn upon this new investment being approved.

From what can be seen, it appears the club is facing a severe cash flow squeeze, which is challenging the club’s working capital position. Indeed, the club states that they forecast to breach their overdraft limit in Q1 of 2023 – for context there are six weeks left, so this therefore is time critical for this to be resolved. In short, working capital is the money or cash available to meet a business’ obligations. It would appear that any application for the overdraft to be increased has not been granted, given the urgent need for this injection of funds.

Leicester’s cash flow pressures have been caused by multiple factors, all combining at the same time:

• The cancellation of home fixtures caused by the administrations of Worcester & Wasps has contributed to fewer home games at this point of the season than normal, meaning considerably less income and less cash in the bank.

• Interest rates rising fast. The large £7.1m HSBC loan is repayable at a rate of 2% above Bank of England Base Rate, which currently stands at 4%. Indeed, it increased by 0.5% at the beginning of February. For context, when the loan was taken out it was 0.1%. So a 2.1% repayment now stands at 6.1% - repayments have tripled in 18 months.

• Energy rates rising, meaning increased running costs for both Oval Park and Welford Road.

• DCMS loan repayments begin September 2023 (this is probably of secondary concern presently).

As a result, it would appear Leicester’s day to day cash position is severely under pressure. In simple terms, they are potentially running out of money at present unless something changes. Therefore it appears that this injection provides the funding to cover the overdraft limits being breached, allowing the club to meet its obligations in the short-term as well as provide financial security in the medium term also.

Alternative Options?

It is a good thing that this option is available to the club, because there are few alternatives, and they come with risk. As a result, this motion really does need to be passed, for the good of the club. The Alternative Lending market is not a guaranteed vehicle for funding being provided, as the club may be considered too risky to be offered funding. Alternatively, if funding is approved and offered, it is likely to be under such high rates as to not be worth doing. There are also the time pressures that the club is facing, given the overdraft limit being breached, which could again mean the club spend valuable time chasing a venture that does not get approved, leaving them in further trouble.

The club could offer out shares on a General Offer basis to external parties. However, with speed a major factor, there is no guarantee the money is raised in the time needed to meet the obligations. There is also the possibility the shares go for a lower price than indicated in this investment offer, meaning less money for the club. Whilst all could go well, and neither of those things happen, it is still a variable and a risk to be considered.

Is this the best option available?

The advantages of the Investment Offer on the table is that it is likely the quickest and most secure way of funding the club through the present difficulties. It also most likely provides a cheaper form of funding than the alternatives. Indeed the document provided by the club states that the funding is to help immediate working capital problems, but to also pay loan and interest payments. It could be that the club overpays some of its loan to reduce the borrowing and repayment costs over time, easing the working capital demands in the future.

It should be said there are also advantages for the two individuals involved. It does strengthen their position in running the club, and puts them in a stronger ownership position. However they did start in a strong position anyway – furthermore, in any case, anyone willing to invest £13m in a rugby club is to be applauded, especially in the current market. The club are lucky that this option is available, to be utilised.

The reality is that this motion does need to be approved because the statement advising the Administrators could be appointed, presents the very real danger the club finds itself in. It may be the biggest club in England, however that does not make itself immune from the very real demands of business. Covid-19 has hit the World Economy sideways, Tigers are very much caught in the storm. Being on course to breach the overdraft limit shows this issue is of the most importance and should not be dismissed as hyperbole, and instead be taken seriously by everyone associated with the club. The positive for the club is that there are six home games left. This will hopefully allow the club to catch up its cash position alongside this investment, and secure its position financially medium term.

However, this should be another wake up call for rugby across the board. Tigers are the biggest club in England, attracting regular crowds of 20,000 or more, with very strong sponsorship incomes as well as healthy retail and merchandise sales. If they are struggling financially and find themselves in such a perilous position, what does that state for the rest of the league? Rugby Union in this country is at a crossroad, two clubs have gone into administration already this season, quite clearly they are not alone in facing financial difficulties. The good news for Leicester and their fans is that a lifeboat is available; they and/or others may not be so lucky in the future.