Tuesday, 3 April 2012

The Thais, Liquidation, and the State of Football Today

This article is adapted from a forum post by Mustapha_Teabreak on the popular Bentley's Roof message board.

However little the Vichai and Aiyawatt Raksriaksorn know about football, they know business. Their King Power duty free business is one of the largest companies in Thailand and one of the biggest duty-free retailers in the world. The Thais are the front for a substantial investment fund, Asia Football Investments, and as a consortium they own Leicester City Football Club outright. However, the investments from the Thais and from AFA are mostly in the form of loans to the club. So where does this leave the Foxes?

Going into the deal, AFA and the Thais were surely given a magic number that would stand as a worst case scenario. If their investment were to see them making a loss, that magic number would give them an idea of how much are they are prepared to lose and when to get out of the deal - exactly like any good casino gambler who knows exactly when to cut their losses and walk away from the table.

In any case, should Leicester City fail to make the Premier League and offer the investors a good return, to get out the owners would have two options: sell the club as a going concern, or liquidate the business and enter administration.

Unlike Scotland, England has a preferred creditor rule, so it would be reasonable to presume that AFA (that has paid the loans to the club) will be in some way football related. Taking a ball-park figure of £30 million as the value of the football club, with another £30 million of outstanding debt owed to them (in the form of loans), the Thais would have three options:
  1. A sugar daddy comes in to buy the club, paying the Thais £60 million, in full, right away. This is unlikely to occur whilst the club languishes in mid-table in the second tier.
  2. Sell the club for £30 million to an interested party but keep the loans open. Then, if the club get promoted, the remaining loans can be called-in.
  3. Call in the loan to force liquidation. As probably the first preferred creditor, the Thais would get the first choice to asset strip the club, as happened at Portsmouth.
Any venture capitalist (and that is what most of the investors are, hoping to cash in on promotion to the Premier League) would have this magic number of money they can afford to have tied up for 3-5 years. What they simply cannot afford to do is to give an endless supply of cash to a club with no hope of returning it.

This leaves a difficult choice for the Thai owners, yes, but it is far from an impossible decision to make. And, if they are half the businessmen they seem to be, they will have a planned escape route that could leave Leicester City teetering on the brink of extinction.

Meanwhile, across the Trent it is thought that Derby County are in a very sound position indeed. Clubs historically have had local owners with ties to the community and local businesses and the Rams seem to following that noble ethos. Shunning the idea to get promoted at all costs might mean that they are consigned to mid-table mediocrity, but it sees them secure in their future and not at the whim of expensive loans.

Regardless of the impending UEFA funding rules, if more teams did what Derby have done and refused to take top-flight ageing cast-offs on season long loans (essentially making the Championship nothing more than a reserve league), football might start a slow but steady recovery in the eyes of ordinary fans.

One of the things that has seemingly hurt the second tier in the past decade is the use of Premier League fringe players as loanees. This means that short-sighted owners can get a better team temporarily, at the expense of long term player development. As an ideology this fails ultimately when owners have to go back to the marketplace to buy quality long-term options, as the loan system has been used in lieu of developing young players already at the club. Blackpool should be credited not just for the way they went about their football in the top flight, but also for not going all out and spending themselves into oblivion when they got there.

The path of reaching the Premier League at all costs will not work and will cause more clubs to come a cropper in the future. At some point a 'true' top flight team will run into dire financial difficulty and the FA will be forced to find a solution. Much rather sooner, before that happens, than when one of England's biggest clubs is lost forever.

So where does this leave Leicester? Let's say Nigel Pearson gets shunted, all the big earners are sent on their bikes and City get a young and hungry manager with team players coming through the academy and solid lower league players being given their chance. Perhaps a new chairman would get back to giving a manager 3-5 years to build a side. So what if the choice is made to have a club for the future instead of short-term success?

I'd take League One, stability, and a locally owned club that's good for the community over the shambles we have now.
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