16 August 2016

hawks at the fringe: Underbelly 2015



Underbelly was founded in 2000 by Ed Bartlam and Charlie Wood. What began as a single venue for a handful of Edinburgh shows has evolved into a sprawling live entertainment company that produces shows and festivals across the globe (along with a much expanded Fringe programme). In 2015, over 5 million people visited Underbelly events worldwide but only 215,000 of those were tickets sold at the Fringe. From the previous post, The Pleasance's audience in 2014 nudged past the 400,000 mark.*

Underbelly's diversification into live events has evidently been of huge benefit to the organisation. Whilst The Pleasance maintains a clear seasonal focus with annual success riding on Edinburgh box office, Edinburgh is only a small part Underbelly's undertakings for the year. Not having all their eggs in the Edinburgh basket allows Underbelly to spread the risk across their portfolio of events, theoretically stabilising annual revenue. Underbelly have also been cautious (historically) about taking on too much risk: commercial partnerships with Smirnoff and E4 being used to leverage new spaces into existence.

A quick word on structure: unlike The Pleasance, Underbelly are not a charity. They do not have trustees and the associated obligations, they do not have charitable aims/objectives and they have different reporting requirements when it comes to their accounts. Underbelly Ltd. is a private limited company (as opposed to a company limited by guarantee) with shareholders (as opposed to members): the majority shareholder (86%) being 'By Popular Demand Promotions Ltd.', a parent company owned by Ed Bartlam and Charlie Wood. The remaining shares are held by Underbelly's Non-Executive Director Thomas Page, a partner at law firm Cameron McKenna, who specialises in hotel/leisure mergers and acquisitions.

It seems safe to infer from the choice of structure that Underbelly Ltd. (and the parent company) exists to create value for the shareholders listed above. The following analysis differs slightly from the usual hawk fodder (where the organisations theoretically exist to fulfil their charitable objectives rather than create shareholder value) as a result. For example, 'turnover', 'cost of sales', or the 'profit/loss statement' are not terms readily applied to charities.

The 2015 accounting period examined below was extended by Underbelly and ran from 1st January 2014 to 31st January 2015, representing 13 months trading. Changes of accounting period are often done because a company wants a set of accounts to tell a particular story. This is 100% speculation but it seems likely that Underbelly would have extended their accounting period in the hope of the debtors number reducing (see the later balance sheet) before they had to file. It's probably what I would have done if I were them because:

Small businesses in the UK have to provide a lot less accounting information if they meet two of the following three criteria: fewer than 50 employees, turnover of under £6.5m and balance sheet assets of less than £3.26m (note: these numbers were revised upwards by the government in March 2015 to £10.2m turnover and £5.1m on the balance sheet). Being classified as a small business means an organisation can omit the p/l statement and cash flow statement, so the upward revision of those numbers means much less transparency (and don't even get me started on planned changes to scrap Companies House records that are older than 6 years). For the accounting period in question, Underbelly's turnover was ~£13m, employees numbered 25 and balance sheet assets were ~£4m (£2.75m of which comes under debtors, up from £1m in 2013). If the debtors number had come down, Underbelly would have only have had to submit a balance sheet (as their parent company did), and this would be a very short and highly speculative piece of analysis.

Underbelly's gross margin has moved up to around the 21% mark in the 2015 accounts (from ~17% in 2013), which is in the region one would expect for live entertainment. Gross margin (gross profit divided by turnover) is largely dictated by sector but the operational efficiency implied by improving margins is certainly something to be appreciated. For a very basic comparison, Live Nation's gross margin fluctuates from 25% to 35% depending on the quarter (a company producing cheap physical goods such as Primark would expect to have a gross margin of around 40%). Maintaining the same level of administrative expenses is a reasonable (but again basic) indicator of Underbelly's operations becoming more efficient and seems to be the key to the jump in the EBITDA number (Earnings Before Interest, Taxes, Depreciation and Amortisation). From a cursory look at the P/L Statement, 2014/2015 appears to have been excellent for Underbelly. Here's how that looks on the balance sheet:


Underbelly's fixed assets are mostly listed as plant/machinery which probably translates as staging equipment, inflatable purple cows etc.. As mentioned earlier, the debtors number is largely made up of box office income that is yet to be received. The jump in the creditors is due to Underbelly taking a £500k loan from the parent company (By Popular Demand Promotions), presumably for cash flow reasons. There was also a jump in 'accruals and deferred income', meaning Underbelly have either received payment in advance for an event not yet completed or have not yet invoiced for a portion of income received during the period.

Shareholders' Funds doesn't usually feature here. This figure represents the theoretical amount that the shareholders would receive if the company were to liquidate on the date of the balance sheet. Underbelly have issued 400 ordinary shares to date: 343 to the parent company (ownership of which is split 50/50 by Bartlam and Wood) and 57 to Non-Executive Director, Thomas Page. Underbelly paid out a total dividend of £235,000 (dividend per share of £587.50) in the 2014/2015 period compared to a dividend of £160,000 in the 2013 period (dividend per share of £400). Dividends are usually used to pay the directors in a tax efficient way in companies of this size and as such are a reasonable indicator of the directors' perception of their company's health. Increasing the dividend by almost 50% certainly says that Underbelly are performing their primary function efficiently.

One of the great things about looking at Underbelly's accounts is that they are obliged to include a cash flow statement. Charities have traditionally not had to submit these but that should be changing soon (if it hasn't already, I believe the changes were made in March 2015 so upcoming accounts should feature them). Underbelly's cash flow statement is not replicated here but it seems to show the same story outlined above (Underbelly have taken a loan from the parent company to help with cash flow whilst waiting for box office cash to come through). The most interesting thing to note about all this is that the directors are clearly very confident that the cash will actually come through.

They might both be 'Big 4' but Underbelly are very different to The Pleasance.


* Worth noting that there can be discrepancies when looking at Fringe ticket sales. Underbelly specify that the number they are reporting is tickets sold. However, The Pleasance do not make it clear whether their reported figures represent tickets sold or tickets issued. The issued tickets number would of course be inflated by including papering, industry comps, press and other passes.