Leeds' future in doubt after record losses

The long-term survival of Leeds United remains in doubt after the club yesterday announced an annual loss of £49.5m, a record in British football. The club's chairman, Professor John McKenzie, claimed that Leeds have "begun to slowly turn the corner" after the "nightmare" of their recent pecuniary woes. However, financial experts believe Leeds' situation will only get worse, with bankruptcy a real possibility.

Leeds' results for the year to 30 June 2003 show a number of problems. Turnover fell 21 per cent to £64m. Season ticket sales, gate receipts, sponsorship and merchandising revenue all fell. Television and broadcasting income dropped by 36 per cent to £21.9m.

Losses as a result of transfer dealings stood at £17m despite a fire sale of players, including Rio Ferdinand, Jonathan Woodgate, Robbie Fowler, Robbie Keane, Lee Bowyer and Olivier Dacourt. The transfer losses are due to Leeds' long-term "leaseback" methods of buying new players or "mortgaging" others.

Even after the offloading of staff, the wage bill rose by £3m to £56.6m, which equated to 88 per cent of turnover. Part of the rise can be attributed to £5.7m in compensation pay-offs to former staff members, including the former managers Terry Venables and David O'Leary.

Leeds' net debt has risen to £78m, with the largest portion of that being the £60m loan that the former chairman, Peter Ridsdale, arranged in September 2001 to finance his "dream" of turning the club into a European power. The loan threatens to undermine fatally the club's future. Interest-only repayments already run to £4.2m per year. But the "honeymoon" phase of the loan, where no capital repayments are needed, expires in September next year. After that, repayments will be more than £7m per year for the next 23 years.

McKenzie hopes to persuade the lenders to allow Leeds to pay back less each year but for a longer period, giving the club some respite. Yet in the results document, the club's finance director, Neil Robson, concludes: "There remain uncertainties regarding the outcome of this process."

Vinay Bedi, a football analyst at the stockbrokers Brewn Dolphin, said: "The interest payments and the cost of servicing that debt pile is slowing strangling the business."

McKenzie remains upbeat. The club's key to survival - earning more than it spends while also servicing its loans - is achievable, he believes. He said that the hiring of the former Chelsea chief executive, Trevor Birch, a debt consolidation specialist who starts work on Saturday, will help, as will a £4.4m cash injection (in return for shares) from Allan Leighton, Leeds plc's deputy chairman.

McKenzie also insisted: "We will not sell a player unless they ask to go and that will only be when the price is then right." He added that since his appointment earlier this year, Leeds have also cut their annual costs by £20m, something that will not become clear until next year's figures are revealed.

Dr Bill Gerrard, a professor at Leeds University Business School who has close, long-term links to Leeds United, begs to differ about McKenzie's belief that the club can break even within a year. Leeds' turnover is likely to continue to decline, he said, to around £50m by next year's results. This will be due to attendances and sponsorship falling and because Leeds have sold their travel business, which contributed £5m to this year's turnover.

Dr Gerrard estimates that McKenzie needs to cut expenditure by some £39m a year to break even. "To date he has reduced only £20m and look where the club are, second bottom of the Premiership," he said.

So not only do Leeds need a further £20m cut in expenditure to break even, but they must achieve it while their debt repayments are increasing and hope not to get relegated in the process. Relegation would see income plummet by at least another £20m. Administration would be inevitable.

A substantial investor could help stave off the problems. The businessman Peter Wilkinson, a Leeds fan with a £400m fortune amassed through internet ventures including Freeserve, is one long-shot contender.

In the meantime, McKenzie will no doubt continue to talk, as he did yesterday, about the "good ship Leeds" and "turning a corner" despite "some odd rocks around which we have to get past before we hit clear water".

Similar words were probably once uttered by a certain E J Smith. He was the captain of The Titanic.