Monday, 15 March 2010

“We are ownership neutral” – Is this Liverpool’s 2005 moment?

Warning: this post gives sympathetic coverage of Liverpool Football Club’s problems with owners and debt, if you wouldn’t piss on a scouser if he was on fire, please navigate away from this page.

The quote in the title of this post is something repeated several times (with some perverse pride) by Dan Johnson, the Premier League Head of Communications at the BBC’s “Football in the Red” debate in Manchester two weeks ago.  His statement was met with derision by the audience because it summed up the football authorities’ blasé approach to one of the key problems in the national sport.  I may have lost my temper with him and accused him of ludicrous complacency.

I do have some sympathy for Dan (who I can only imagine was desperate for a challenge when he accepted the role), after all the man has to clean up after Richard “£866,000 and no clouds in the sky” Scudamore.  Dan tried to fob the BBC audience off with the Premier League’s souped up “Fit and Proper Person Test” and the laughable new “early warning system” (relying on auditors to spot problems, just like they did so brilliantly at Enron, Lehman Brothers or Portsmouth FC).  The Premier League can tinker with processes and procedures, but the overall philosophy hasn’t changed, if it’s legal the Premier League are in favour of it, if Pompey have four owners in 12 months, that’s fine.

This weekend, news has emerged that a private equity firm, Rhone Group has offered to invest £110-120m (reports differ) in Liverpool FC in exchange for a 40% stake.  The club’s current owners, Hicks and Gillett would have to accept this 40% dilution, but with the deadline for their Kop Football (Holdings) Ltd acquisition vehicle to reduce its debt rapidly approaching, not accepting such an offer could lead to the owners forfeiting their shares in the club.

The financial structure at Liverpool is not dissimilar to that at United, with over-stretched owners desperate to solve a debt crisis that was entirely of their own making.  Neither club has gained anything from the leveraged buyouts that were used to acquire them.  In United’s case, the main consequence has been the pricing out of traditional supporters, whilst at Liverpool Hicks and Gillett’s stewardship has further delayed the building of a new stadium that everyone agrees is needed.

Although (according to figures from Benitez’s net transfer spending since he took over at Liverpool is actually £1m higher than Sir Alex Ferguson’s over the same period (and that is ignoring the proceeds from the sale of Ronaldo destined for the PIKs), the amount of revenue generated from matches at Anfield is far too small vs. other comparable clubs.  Hicks and Gillett haven’t produced accounts for last season yet, but looking at the 2007/08 numbers, Liverpool only generated revenue of £1.3m per home game vs. £2.3m at Chelsea (who have other sources of cash of course) and more than £3m per game at Old Trafford and the Emirates (these other clubs’ figures are for 2008/09).

Last season reported
Competitive home games
Average attendance
Average attendance/capacity

Revenue per game (£m)
Revenue per available seat/game (£)
Revenue per occupied seat/game (£)

The reporting in the weekend papers suggests that Rhone Group would pay down Kop Football (Holdings) Ltd’s debt with its equity injection.  This would greatly improve the chances of raising capital for a new ground.  So far, so altruistic (“Scouse Knights” perhaps?).  But of course the arrival of a business like Rhone Group on the scene marks a new, sad twist in the pawning of the English game.  The Glazers made a half-hearted and wholly unconvincing attempt to paint themselves (or at least Joel) as United fans.  Hicks and Gillett launched their takeover talking of their intention to be “custodians” of the club which they would hold as a “family asset”.  Whilst many Liverpool supporters had been hoping Dubai International Capital would acquire the club, the acquisition by Hicks and Gillett was initially generally viewed positively by fans and it took eleven months before organised supporter opposition began in earnest.

Rhone Group will not of course claim to be staffed entirely by Liverpool supporters, they are transparently in it for the money.  For many Liverpool supporters, the temptation may well be to welcome any new owners, especially one who could pay down almost half the club and parent company’s debts.  I think welcoming such attention would be a terrible mistake, private equity firms can’t spell altruism let alone practice it.  Look again at the table of matchday income above again.  Liverpool bring in around £30 per occupied seat per game.  The two London clubs bring in more than £50.  United is now far closer to Arsenal than its traditional north western rivals.  In 2004/05, the last year of the plc, the equivalent number for United was £33, revenue per seat has risen 45% since the takeover, a small amount of the change is “mix” (relatively more corporate facilities when the quadrants opened) but the vast majority of the change is from higher ticket prices.

Rhone Group (and no doubt other similar organisations) see the opportunity to get into Liverpool at an enterprise value of just over £400m.  They no doubt see a famous club with a global brand, charging ticket prices 30% below those at United.  They see desperate current owners.  They smell a money making opportunity.

For the Premier League, a deal along the lines Rhone Group are proposing will no doubt be seen as a triumph.  At least £100m can be knocked off the Premier League’s debt total, a shiny new stadium may well appear, the appeal of the league to global capital will be confirmed.

Best. League. In. The. World. Fact.

As Dan from the Premier League said, they are “ownership neutral”, they care nothing for the motivation of people who buy into our top clubs, they care nothing about the consequences that flow from allowing financial buyers to acquire clubs, and if in five years time aggressive pricing policies have stopped thousands of Liverpool FC’s traditional, working class support from being able to see their club, well, that’s business......

Of course next weekend we play Liverpool at Old Trafford, just over 100 years after we first played them there. I understand how controversial the idea is of United and Liverpool supporters coming together in some way to protest at what has been done to our clubs, but I’d ask people to think who the real enemy are before dismissing all such ideas out of hand.



Quetzalcoatl said...

It's clear that the only solution to this ever-worsening phenomenon is statutory intervention. The Premier League's 'voluntary' policing is at best short-sighted and at worst (more likely), conniving.

Funny that the government loves everything statist apart from when it comes to ring-fencing our national heritage from the mindless savagery of finance-at-its-worst.

As for us and the 'dippers chumming together next week, much as I loathe the f*ckers, it wouldn't feel entirely wrong.

However, I think the vast majority, myself included in the ferment, will be busy singing of their fiery demise atop a bonfire...

Anonymous said...

It seems more and more likely that the powers that be take a completely indiffedent view of football and will let it become a victim of the "fre market". So what better slution than to let supporters take a more active role in the runing of clubs, people who have the clubs' best interests at heart and who treat their respective clubs as an extension of their family.
I'm sick to the back teeth of hearing the argument that "football is a business" so shut your gob if you think
differently. Sorry but the "fit and proper persons test" is a joke so the fans need to have a voice in who is running their club.

Steve S

jim said...

In every situation where sporting entities have been run for profit the ordinary fans suffer. As a lifelong LFC fan I have no confidence whatsoever that this new bid will do anything but further damage the club and marginalise the traditional fanbase in favour of empty corporate boxes. Its only a matter of time before we are charged similar prices to you guys at Man U and at the Emirates. English football needs to be run much more like the Bundesliga and even if that means no longer dominating the Champions League at least it would be more sustainable and we wouldn't have to see clubs like Cardiff City going to the wall or seeing kids unable to go to the ground. And you are dead right about PE firms, who have been turning everything they touch to garbage for years now.

Anonymous said...

Absolutely right. These people are raping the country's two most successful and most important clubs, and they'll have much less chance of getting away with it if the two sets of fans can - temporarily - put aside their enmity and join forces. Next Sunday is a match that will be watched around the world. A statement needs to be made that we're not so dumb that we'll just roll over and concentrate on singing rude songs about each other, while these Americans laugh all the way to the bank. (And all those smug London fans bask in our financial decay.)

Anonymous said...

Would you possibly mind explaining how you got to an enterprise value of approx £400m, please? Much appreciated.

andersred said...

Hi there,

The enterprise value calculation was as follows:

Rhone offer £110m for 40% of the equity therefore the equity is valued at 110/0.4 = £275m.

I assumed the current debt (pre-Rhone's investment) is around £235m (I notice David Conn in the Guardian today quoted £237m). That would obviously fall by £110m post the Rhone investment to c. £125m.

Add the £275m equity value to the £125m debt number and you get an EV of £400m.

Hope that's clear.


Anonymous said...

Anders, thanks for the explanantion above.

What I don't understand is why debt is added to the equity value and not taken away from it. I hope that is not a stupid question, just in my simple logic if I acrued a million pounds worth of debt I'm sure my value would go down not up.

andersred said...

Enterprise value is "balance sheet neutral".

A company making EBITDA of £100m is bought for £1bn. If it had no debt, the equity value is £1bn. If it has £500m debt the equity value is £500m but the EV is the same. The buyer is indifferent because he owns the business and the debt is now his problem.

In the latter example (assuming the debt stays in place), the buyer only actually pays out £500m of course.

If you deducted debt from equity, the EV in the first example would be £1bn and in the second zero (£500m - £500m). That makes no sense.

Hope that makes sense!


JE said...

Hi Anders

I know this is now 6 months late, but it's only the recent Liverpool deal that finally prompted me to really start trying to get a handle on what's really going on financially at MUFC and other clubs similarly affected.

So far, I've found your blog immensely helpful - so thanks for shedding some light and all the painstaking background work it must involve.

Just one quick comment on your EV calculation above. I'm not a financial professional like yourself but have been involved in quite a few deals (mainly PE) on the operator side over recent years. Maybe I'm missing something here, but your EV calculation makes sense to me up to the point you reduce the debt by the amount of cash (presumably) paid up for the 40% of equity. Surely that cash goes into the shareholder's pocket not onto the balance sheet of the company?

Maybe this is all moot now that things have moved on and finally been resolved at LFC, but thought I'd ask the question anyway!