Monday 7 March 2011

“A distant subsidiary” – Who is Peter Pannu trying to kid?

Last week Bloomberg and the various other media ran reports that Birmingham International Holdings Limited (“BIH”), the direct parent company of Birmingham City PLC (“BC”) which is itself the sole parent of Birmingham City Football Club PLC (“BCFC”) had some financial problems.

Statements published to the Hong Kong Stock Exchange by BIH relating to its interim results to 31st December showed that the Chairman, Carson Yeung, was having to take out a HK$150m (c. £12m) personal loan (secured on his own Hong Kong properties), and that BIH was raising HK$310m (c. £25m) through a placing of new shares to keep the business going.

Today the press is full of vehement denials by the BCFC board that anything is wrong. Peter Pannu (BCFC’s acting Chairman) said on the club’s official site (my emphasis):

"It is important to note that BCFC (the club) is a separate corporate entity from BIHL (a listed company in Hong Kong). Although a distant subsidiary, BCFC's accounts are separate and it operates on its own financial basis.
"BCFC is in credit with their bankers and there is no financial impediment to its operations. We will have no problem securing UEFA licence approval for which the club had already filed the papers.
"As for BIHL, the financial support by a major shareholder is a common occurrence and there is no cause for concern or any direct links to BCFC's wellbeing."

This is a completely ridiculous and totally misleading statement that insults the intelligence of Birmingham City's fans.

"Material uncertainty"
BIH’s interim accounts show a “material uncertainty” that the group (i.e. including subsidiary BCFC) can continue as a “going concern”, in other words there is a major risk of insolvency. That is the source of press stories last week.

BC and BCFC’s full year accounts (published in October 2010) both contain exactly the same “material uncertainty” as BIH’s accounts (see pages 7 and 13 respectively). In note 1 of the BCFC accounts (page 13) more details of the club’s cash needs are given:

“The forecasts show that the Group [i.e. Birmingham City Football Club] needs funding of around £7.5m from its parent company [BIH] in the short term in order for the Group to continue to operate within its agreed bank facilities..... The sensitised forecasts [that BCFC stays in the PL but at a lower than hoped level] shows a further requirement for funding of up to £3m in June 2011.”

The BCFC accounts then go on to talk about the placing of new shares in BIH (also page 13) and say that:

“The directors of the parent company [BIH] have confirmed that £7.5m of the funds to be received from the placing are expected to be transferred to the Group by the end of November 2010 and have also confirmed that additional funds of up to £3m will be made available to the Group from the placing proceeds noted above later in the year as and if required.”

So BCFC is entirely reliant on funding from BIH to stay within its banking facilities. This money is needed even if BCFC fight off relegation and no forecasts have been presented to the auditors on the basis that BCFC (currently in 18th place but with games in hand) go down

Far from being a “distant subsidiary” of BIH, BCFC is entirely reliant on it for financing as is described in detail in UK Companies House filings from October. Peter Pannu is significantly misleading supporters by claiming the financial fortunes of BCFC are not tied to those of BIH. If BIH fails, so does BCFC.

Where things stand in March 2011
The comments by the auditors in the BC and BCFC accounts were from October, so perhaps Birmingham City fans should heed Pannu’s words that there are no “financial impediments” at the club? Well what the BIH statement to the Hong Kong Stock Exchange on 3rd March 2011 tells us is that things have not got any better since October:

1. It is not clear whether Carson Yeung has actually taken out a personal loan secured on his Hong Kong property. The 3rd March statement by BIH say that he will “apply [for] a credit facility”. The BIH accounts in October 2010 said the same thing (page 56). Does the loan exist?

2. The placing referred to in the BCFC accounts as the source of funds to keep the club within its banking facilities has still not taken place. Although the BCFC accounts said the money would be transferred to the club “by the end of November 2010”, on 25th February 2011, BIH announced the placing would be extended until 25th March 2011. Only 29% (around £7.2m) of the placing is “underwritten” (i.e. guaranteed by the broker leading the placing), the majority may or may not be raised.

3. BCFC represents 94.5% of BIH’s turnover in the six months to 31st December 2010. BIH has no other material businesses.

4. BIH has announced and then aborted two deals to buy businesses apparently owned by Carson Yeung since it bought BIH. BIH has also announced two property deals with Mr Yeung to acquire land he owns or is intending to buy in China. The largest of these two property deals includes the payment by BIH of £5.6m in cash to Mr Yeung (see page 4 of BIH circular published on 19th January). No information is given as to where BIH will obtain this cash.

5. At 31st December 2010, the BIH balance sheet showed a cash balance of only HK$ 18.5m (c. £1.5m). In addition to its HK$ 125m (c. £10m) of debts (all related to BCFC), the club also owes a further HK$ 128.3m (c. £10m) in stage payments on previous transfers.

Carson Yeung may or may not be a wealthy man, we have no way of knowing.

Mr Yeung (who has already lent the club £15m) may or may not have borrowed £12m to support Birmingham City. Whether the loan has been taken out is not clear.

Mr Yeung may have property assets in mainland China which he intends to sell to Birmingham City’s parent company, but the ownership of the land is not properly disclosed. The source of any cash consideration for these deals is not clear.

If one of these deals takes place (the purchase of development land in the Liaobin Economic Zone, Panjin City, Liaoning Province, PRC announced on 19th January 2011), unnamed "guarantors" may end up holding convertible preference shares allowing them to become majority owners of BIH and hence Birmingham City Football, but again disclosure is inadequate.

Birmingham City’s parent company may be about to raise around £25m in new shares through a placing to help the club, but the placing is four months late and only a third of the money is guaranteed.

The Premier League may be on top of all this. But maybe not....

If I was a Birmingham City supporter I'd want answers rather than patronising bullshit from Mr Pannu.