The light at the end of the tunnel (is the light of an oncoming train)

Possibly the only thing better than the rarest of all rarities, a Gills away win, has been the way it singularly failed to distract supporters’ attention from important off-the-field matters. In the past the arrival of a match has been enough to dissipate anger or dissatisfaction at developments in the Gills’ precarious financial position. This time, perhaps because the Crewe game with its reportedly encouraging performance was away from Priestfield, the ignorant masses have continued to question the way the club has been run.

Three crucial statements emanated from the club this week regarding the finances and possible solutions to the club’s problems. The first was a bald announcement of an EGM to ratify the proposed sale of Priestfield to a separate company “in which Paul Scally has an interest” for £9.8m. This raised more questions than it answered. The third was an attempt by Mr Scally to answer some of the questions which inevitably arose from such a sparse announcement. In between came the annual accounts for 2006-7 which appear to undermine some of the claims made elsewhere by our chairman.

Crucially, in both the Chairman’s Statement in the accounts and his later missive, he claimed that the company made a profit of £160k in the year to 31 May 2007. But this figure does not appear anywhere in the accounts, which report an operating loss of around £300k. Somewhere in the midst of this Mr Scally would have us believe that the high interest payments servicing the overdraft are strangling the club. The reality is more prosaic: even if we were paying no interest at all the books still wouldn’t balance, unless further drastic cutbacks have taken place since in the last six months. In light of this Mr Scally’s claim that the debt left post-sale would be not only normal and manageable but could be repaid in a couple of years, seems disingenuous to say the least.

So what are we to make of the proposed sale of Priestfield to the company Priestfield Development Limited? In short, alarm bells ringing right left and centre.

There is nothing to suggest either the bank will write off any of the debt or any outside investor is involved. So GFC and the “new” company Priestfield Development Limited will owe just as much between them as GFC does at the date of transfer. Apparently the bank has suggested the new arrangement. On the plus side it means it isn’t another of Scally’s bright (read: expensively loss-making) ideas. On the minus side the bank can hardly be trusted to do what’s best for GFC: the PR implications of forcing the club to the wall could be costly but they aren’t obliged to row against a swelling tide and their first priority will (indeed should) be to protect their own interests.

Mr Scally has now clarified that he will be the sole owner of PDL. This is intended to reassure us because as we all know he has the interests of GFC at heart and would never screw us over. The problem is that in most other industries the sale of a company’s chief asset to a separate company wholly owned by its CEO, for a price below the valuation listed in the most recent accounts, would attract suspicion. The next step would be to wind up the rump company with no assets and a significant debt. That rump company is GFC. This might not be Mr Scally’s intention but it’s not hard to imagine he would be tempted, given it’s clear our beloved club was primarily a business venture and after 12 years he is nowhere near making enough money to retire to Dubai or wherever. And even if he is determined to do the right thing by GFC, that’s good only as long as he is able to retain control. He could be run down by a bus tomorrow (stop praying at the back) and who’s to say what Adam & Co would choose to do with their inheritance.

It’s clear that the aim is to split out the stadium and its possible replacement from the day-to-day football business. Yet GFC will be entirely at the mercy of PDL and whoever owns it. Crucially, the proposal contains no explanation of how Priestfield Development Limited can be a viable business. GFC will be “effectively” (whatever that means) paying no rent for at least three years. Can PDL really find £9.8m in funding without having to pay interest? If so, it would surely be only from a company (MHS Homes?) that regarded the land as cheap and wanted to realise the asset at a specified date. Perhaps the more logical explanation is that the bank is again putting up the money and will add the interest to the capital, just like mortgage arrears. As it happens that’s exactly how the club’s debt has been managed up until now.

The hope is that property values will rise faster and eventually produce a surplus. But the recent credit crunch has taught us among other things that securing short-term borrowing against long-term returns is a recipe for ruin. Further, there’s a considerable chance that property prices (and land values) will fall, which could leave PDL with negative equity before the ink has even dried on the contract. Add to that the commitment to allow GFC use of the stadium for as long as it has need, and the chances of PDL ever being able to sell the land and repay the debt start to look slim. Unless of course the rent starts to rise sharply after the three year moratorium. The “terms to be agreed” could be anything, including a sum that would force the club to look at other options and allow the land to be sold for development. Clearly either a dramatic fall in the value of the land, pushing the company into insolvency, or a dramatic rise, could make its sale attractive to whoever owned it at the time. If that same person had control of GFC, winding up the club would release the land for sale. Even if Scally remained in charge it’s not hard to envisage a scenario where Priestfield’s value rose sharply and he decided to cash in by selling up and groundsharing, only to find himself unable to secure a new stadium and leaving the club in limbo but with a large windfall burning a hole in his mortgage.

All of this even overlooks the bare fact that a company with no assets will struggle to clear, or even renegotiate at more favourable terms, the remaining debt. If GFC is still trading at a loss and no longer has the possibility of rising asset values to fall back on, the end result is clear.

A solitary plus point in the proposed arrangement is that investors can be brought in solely to the property side who have no interest in football, or vice versa. It’s true this could be very advantageous, particularly for Mr Scally if he wants to sell his share of either company, but the converse is that with the two halves divorced, an asset-stripper wearing a cloak of fandom could easily sneak in. It’s been done many times before: ask York or Wrexham, for starters.

Somehow we are expected to regard this as a “fantastic” deal. Why? We all know the club is broke and needs fixing, but is this really the right way, or the only way? Scally has never claimed the restructuring is a last resort, forced on the club. Of course, many of the worst-case scenarios such as shutting down the football club in order to sell the land are very feasible under current arrangements. But the proposed scheme appears to change very little. The overall debt remains the same and so, broadly, will the overall interest payments, unless there is some remarkable facet of the deal that Scally has omitted to mention. Selling the stadium leaves the club devoid of its key asset, at the mercy of PDL’s viability and vulnerable to predators. Assuming PDL’s business model is based on an escalating value for Priestfield, why could the same not have supported a continuation of the current funding arrangements?

Some tough questions should be asked at the EGM. We can only hope the captain doesn’t shrug his shoulders like last time, or continue to insist the ship is taking in water because of a freak wave when we all know it was the gold-plated conference suite that did it. Whatever the true intentions of the proposal, it looks suspiciously like the captain shuffling the deckchairs and whilst he’s at it, moving the ship’s safe into his lifeboat “for safe keeping”. And that’s quite enough Titanic analogies, before the Crewe result is forgotten again.

The Long Lost Bod

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7 Responses to The light at the end of the tunnel (is the light of an oncoming train)

  1. PatTerryHeader says:

    “he claimed that the company made a profit of £160k in the year to 31
    May 2007. But this figure does not appear anywhere in the accounts, which report
    an operating loss of around £300k. Somewhere in the midst of this Mr Scally
    would have us believe that the high interest payments servicing the overdraft
    are strangling the club”

    “Interest payable £811,020” v “Operating loss of around £300k”

    “The reality is more prosaic: even if we were paying no
    interest at all the books still wouldn’t balance”

    eh, how do you work that out then TLLB?

  2. The Long Lost Bod says:

    Simple explanation: the operating loss is before interest. After interest and depreciation the loss for the year was over £1.1m.

  3. blueworm says:

    The mystery “profit” of £160k is before both interest and depreciation (this difference between these two figure is depreciation of about £450k). So you could argue that the club would be just about profitable we had never had to spend all that cash on the stadium.

    Of course a tiny profit or loss like this is neglible compared to the huge debt.

  4. Flagman says:

    PTH

    The accounts cover the period upto May 2006. The profits made up until May 2007 would not appear in these…would they?

  5. PatTerryHeader says:

    Quite right they wouldn’t, but it was TLLB who made the statement not me, I merely quoted his article.

    The only point I was making was that the interest is higher than the operating loss, meaning that without paying interest we would make a profit. However as TLLB has explained above, my supposition is incorrect.

  6. The Long Lost Bod says:

    The latest accounts published last week were to 31 May 2007. Some of the numbers were similar to the 2006 figures, although turnover decreased significantly and the interest payment and overall debt both increased.

  7. Phil Hughes says:

    Can someone tell me what’s going on at the Gillingham Supporters Trust?
    No ‘home page’ movement since December 2006.
    What kind of supporters trust is it?

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