OK, admittedly, the above headline has been deliberately created for maximum impact (and to make a point). However it is not with some validity - I will explain.
During their promotion season, Leicester spent heavily (by Championship standards) on wages. When you exclude around £9.4m of bonuses paid for gaining promotion, their wage bill was just short of £27m (for comparison Derby’s last reported wages were £13.5m).
The Championship FFP rules in place when Leicester were promoted (2013/14) required clubs to keep losses below £8m (allowing for a few exclusions, including bonus for winning promotion and youth/community spend). Any club that was promoted having exceeding the £8m loss limit would be given a fine (according to fixed tariff which increases with the amount of the overspend). The position is complicated but everyone was expecting Leicester would end up with a 'Fair Play Tax' (or fine) of around £8m. However, to everyone's surprised, they announced that they had kept losses within the maximum allowed and didn't have to pay any fine at all! So how did they do it?
The clue is in the club accounts and particularly in an £11m increase in 'Sponsorship, executive suites, advertising and other income' which grew from £5.2m to. £16.1m:
Although the club didn't break down this increase, the Chief Exective did highlight a significant deal from a company called Trestellar for securing a 5 year deal to market Leicester abroad. This was explained as follows in the accounts:
David Conn in the Guardian did some excellent digging into Trestellar early last year and found that the company is a company on an industrial estate in Sheffield (address; Unit 6, Shepcote Estate) with neither a website or telephone number and at the time only had one employee. Further accounts have been released since then so things appear to have become a little clearly.
It all hinges on the role of Sir Dave Richards: the 72 year old former Chairman of the Premier League who comes from Sheffield. He has had long-standing links with Thailand (which is where the Leicester owners come from). Back in 2013 Sir Dave was set to become the club Chairman – with a specific objective of ensuring the club complied with the Championship FFP rules (link) – however for reasons that aren’t clear, it appears he didn’t take up the Chairman role.
This is where things get a little complicated so bear with me.
Sir Dave’s Thai connections are so strong that even managed to bring the contract to make the Thai Premier League trophy to his family company Glue Creative Production Solutions Ltd; they have two websites http://glued-up.com/ and http://www.glue-promotional.com/ (they are based at unit 6 Shepcote estate and are owned and run by Sir Dave’s son, who is called David Richards Jnr). Sir Dave used to be the Director of Trestellar but has since resigned - his son David Richards Jnr has taken over (and David Richards Jnr also director of Glue Creative Production Solutions Ltd, which is a reputable and fairly modestly-sized company). Sir Dave is director of only one company: Kynsman Ltd (based at unit 6 Shepcote Estate); he is co-director with his son David Richards Jnr. It’s all rather confusing so this table should help:
Kynsman ltd is a rather odd little company - according to the website http://kynsman.com/ it offers plumbing sealant products and according to the ‘about us’ page it also offers consulting services such as "an International VIP contact database" and "person to person introductions". Interestingly the company's valuation has been pretty flat in recent years but in 2015 increased its asset value by around £1m. We don't know what happened to generate the sudden increase (although probably not from a sudden increase in plumbing sealant sales).
Trestellar Ltd was a shell company prior to 2015 (with assets of just £1 the previous year). However as at May 2015 it had net assets of around £5.2m. David Conn (Guardian) was not able to ascertain where this money had come from. So what is going on?
One theory is that the Leicester owners (or parties connected to the owners) struck a deal (via Sir Dave) so that Trestellar would be funded via Thailand. Trestellar would then bid for the Leicester marketing contract. It is worth pointing out that having a company pay millions for the right to market a club worldwide is very unusual and I can't think of another UK club that have a similar set-up: after all, how much could a company really make from marketing Leicester worldwide and how could it ever hope to recoup £11m?
It is possible that the sudden £1m increase in Kynsmann Ltd's finances is connected to the Trestellar arrangement and that Sir Dave's plumbing/consultancy company received a 'consultancy' fee.
As a result of the commitment from Trestellar to pay the club ‘to exploit and monetise [Leicester’s] unique brand’, the club have been able to claim the promised £11m from Trestellar as ‘profit’ in their profit & loss account during their promotion season - and therefore reduce the losses at a time when an overspend would otherwise have generated a fine.
According to this theory, the Leicester owners would have effectively injected cash into the club via an artificial payment in an effort to avoid the fine. Given that the Football League are still ‘in discussion’ with Leicester over their FFP compliance, it seems that there are suspicions that this is effectively what has happened. Once the owners had injected cash into the club, the owners can, if they want, take it out in a future season (by paying themselves a dividend from future profits made by the club).
It is hard to say what will happen next. Perhaps the rest of the £5.2m sitting in Trestellar will be paid over to Leicester – however it is also quite possible that at some date in the future (potentially this season, possibly next), the deal with Trestellar will be cancelled (perhaps with the club stating "things didn't work out as we anticipated" or something similar). If the deal is cancelled this will require the one-off exceptional loss of up to £11m to be reported in the Leicester accounts during the year the deal is cancelled. Ordinarily a £11m one off loss in the club accounts would be a problem. However the timing of is transaction is crucial. By getting promoted, Leicester will receive the bumper TV deal in the Premier League and the club can be expected to report a profit both this season and next- hence a one-off hit in the accounts at a time of club's choosing is really of no issue at all. And as for the cash sitting in Trestellar, well, that could go back to wherever it came from.
We should also remember that any 'Fair Play Tax' fine collected by the Football League would go to charity - hence the headline of this article 'Leicester accused of 'creative accounting' in bid to avoid £8m charity bill'.
I must point out the suppositions above regarding Sir Dave Richards and indeed the Leicester owners are just suppositions. I am not in any way suggesting that Sir Dave or anyone connected with Trestellar, Kynsman or Glue has done anything illegal or wrong – just as I am not suggesting that the club have done anything illegal. Indeed it is more likely that the increased business done by Kynsman Ltd relates to consultancy work that is not connected with Sir Dave and the club’s Thai owners. It is also important to remember that Leicester state that they carried out Due Diligence on Trestellar as part of a tendering process and insist the Trestellar deal is genuine - so we should definitely believe them. Also, it is important to note that the auditors (PricewaterhouseCoopers) have approved and signed of the accounts – although they don’t audit Trestellar Ltd or Kynsman Ltd no-one could possibly think that they would have signed off the club accounts that if they suspected the deal was 'window dressing'.
The Football League refuse to comment, other than to say that “the League and Leicester City remain in an ongoing dialogue”.
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