26 August 2016

hawks at the fringe: Summerhall 2013

Acquired by "eccentric millionaire" Robert McDowell for £4m in 2011, the sprawl of Summerhall has become a seasonal base for some of the most exciting theatre to be found at the Fringe. McDowell has frequently extolled the virtues of messy, large, flexible arts buildings and one can only hope that the irresistible rise of Summerhall has been noted by those providing funding to the current generation of large capital projects, which will no doubt be new, shiny, glass, 'coloured-light-at-night' buildings.

McDowell's background is perhaps not what you might expect. A Cambridge educated applied economist and banking consultant (specialising in BASEL II requirements: liquidity tests and systemic risk). He worked at Reuters for a decade, was a subject matter expert for Ernst & Young and a consultant for a Luxembourg based consultancy. On paper, he does not have the sort of CV that suggests he would be setting up an arts organisation anytime soon (although, given arts organisation's predilection for stipulating arts backgrounds on job descriptions, he likely didn't have much choice but to set up his own). His blog gives a taste of his background and makes for interesting reading if banking and economics are of interest (IE, it's even drier than the brouhaha found on these pages).

Given McDowell's background, the acquisition of the old veterinary college cannot purely be the stuff of whimsical fancy. In addition to the £4m upfront cost, my estimate is that a further £2m has been invested into Summerhall. Not small numbers for an organisation with ~45 permanent members of staff and that receives no funding from Creative Scotland. *

Summerhall are not a charity and McDowell is now the sole shareholder. Since Summerhall qualify as a small company, they are entitled to file abbreviated accounts (balance sheet + notes). The most recent set of accounts available covers the 2013 period and Summerhall Management Ltd. are well overdue on their last set of accounts (meaning a £1,500 fine and that the 2015 accounts due in September will also have to cover 2014). This means that there is a lot of speculation in what follows (even more than usual).

First thing to note is the value of the fixed assets. Although acquired for £4 million, the land and buildings will have been accounted for at 'cost' rather than 'market' value. Summerhall are the first organisation looked at on this blog that include any Intangible Assets (patents, trademarks or, less objectively, brand value and intellectual property).

There has been significant movement in the stock value. Normally, arts organisations have very little stock but this is likely related to The Royal Dick pub, the Cafe and the Summerhall Shop not being separate trading entities. Note that Pickering's Gin and Barney's Beer are both separate companies.

The Debtors number has increased to ~£450k which rings some alarm bells. We have to assume Summerhall operate 90 day payment terms (because 30 day terms would be incredibly worrying given that number), that would mean that Summerhall have monthly receivables of ~£150k (or annual receivables of £1.8m). Cash flow is dependent on actually receiving advisable. Summerhall likely have some bad debts included in the debtors number that will need to be written off at some point in the future.

Assuming 60 day payment terms for any debts that Summerhall actually owe (note that good businesses should be paying and collecting within 30 day terms for both debtors and creditors), the creditors number implies that Sumerhall's operating cost is also in the region of £1.8m. The change in the P/L account is fairly minimal (an increase of £30k) so similarity in operating cost and receivables seems likely.

This can also be worked backwards. If, for example, Summerhall actually took 120 days to pay creditors, that would imply an operating cost of ~£900,000 (half what was estimated above), which would mean that the debtors number implied 180 day credit terms being offered to Summerhall's debtors (artists, for example).

This is all speculation of course. McDowell put forward that August income in 2013 was in the region of  £750,000. Having never experienced Summerhall outside of the Fringe, it's difficult to estimate what percentage of revenue the Fringe would bring in but being an ardent fan of the power curve, it's tempting to assume an 80/20 relationship. This would make the £900k figure above a possibility.

Putting speculation about the past aside, McDowell's investment is clearly paying off artistically as Summerhall shows dominate this year's awards lists. The questions for the next accounts (when they actually arrive) will be all about cash. As a new business, Summerhall really needs to collect on those debtors and keep the cash rolling in: good cash flow management is imperative and if not done well it is the artists who will suffer. McDowell has clearly invested in Summerhall (as sole shareholder) because of the large audience the Fringe brings in and the lack of new, suitable venues in Edinburgh: very savvy commercial reasons. The artistic success is no doubt  helping commercially as Summerhall broke 2015 attendance records in the first two weeks of the 2016 Fringe but can McDowell actually build something that doesn't require more financial intervention from himself and that sustains itself in the long-term?

If not, he seems the sort of person who will have a plan B.

* Please note, these figures are not completely reliable. They are mostly taken from interviews or presentations given by McDowell but some of them are old and out of date (in some cases by a few years). However, this does mean that the numbers should be roughly correct for the accounting period being analysed. If not then, as always, I am happy to be corrected.