Si Steers takes a look at what FSG are hoping to achieve long term at Liverpool FC.
A LOT of talk this season has been about the future. Urging patience and consideration of the bigger picture has become a consistent part of the Liverpool narrative over the past 12 months. So, what is the bigger picture, what exactly does it mean?
When John Henry acquired Liverpool Football Club in October 2010, there were two reasons why he might have been interested in purchasing the club. The romantic appeal; one that has perhaps become more relevant since he has immersed himself in the culture of the club and seen an opportunity to awaken a sleeping giant. But at the heart of his decision was business; because buying Liverpool F.C. represented a sound business investment, with a potentially high return.
That is how private equity works; and FSG are essentially a private equity firm dedicated to the sporting market. Confined to US sports until the acquisition of Liverpool, FSG took a calculated risk investing in Liverpool in an attempt to expand its (FSG’s) global portfolio.
There will have been a number of things that attracted Henry to Liverpool; the club’s history, heritage, and global following are the foundations of a high value brand, and all attractive to an investor. But the ultimate deciding reason for FSG to decide to acquire the club was the price; Liverpool was sold for an absolute steal. The acquisition debt and default of loan repayments meant that the club was sold in a distressed state.
This meant that FSG were in an incredibly strong bargaining position during negotiations. Liverpool was eventually sold to FSG for between £250-300m. The valuation of Hicks during negotiations was completely flawed as it was based very loosely on potential future revenue. Hick’s vision for the club was all about the stadium: he saw the added value that a new stadium would add to the bottom line; and the huge gap in the club’s commercial activities.
Liverpool has an incredible amount of potential. Our global fan base is difficult to quantify, but broadly speaking we are in the league of United, Madrid and Barcelona. Despite a worldwide following, we remain just above Schalke in the football ‘rich list’ with annual revenues of £203m (at last count): United pull in an additional £165m per year to put that into context.
Of course, the recent deals with Standard Chartered and Warrior swell the coffers. Those two deals alone will make the club circa £45m+ per season. To put that into context, our previous shirt deal with Carlsberg was reported to be just over £7m a year, so the Standard Chartered deal at £20m a year is a huge increase.
Sponsorship deals are a key part of the FSG strategy, but they are only part of the solution. Generally speaking, the value of a business is calculated between 6-8 times EBITDA (earnings before interest, tax, depreciation and amortisation) minus debt. EBITDA is essentially bottom line profit. High value sponsorship deals that are tied into long contracts are an essential part of increasing EBITDA at LFC, subsequently increasing long term value.
The holy grail for FSG is the stadium solution. Getting more bums on seats and increasing our match day revenue has got to be a primary objective. It will be one of the core reasons FSG invested in the club. It is the reason Hicks and Gillette invested in the club. Increasing the capacity by 20,000 potentially means an extra £1m+ per match day: depending on corporate boxes and pricing.
The key to the stadium solution will be cost. I have often thought that the redevelopment of Anfield is a non-starter: the reason being is that the stadium solution needs to be for the next 100 years. Infrastructure, facilities and capacity have to take precedence over romance. If we spend £200m redeveloping the existing Anfield for an additional 20,000 seats, it will be difficult to secure a naming rights partner to part-fund given heritage of the Anfield name, it will restrict options should capacity become a future issue, and it will not solve regeneration and infrastructure problems.
Building a new stadium solves all three of those issues. With the right naming partner we could potentially secure a £150m deal, giving the club a total £150-200m stadium debt.
Whilst that sounds scary, it is worth remembering that that would not be acquisition debt, and the club’s books are relatively debt-free at the moment. With the additional revenue from the stadium and sponsorship, we should be able to manage debt and stay competitive. But the sums have to work.
Related article: The Stadium issue, we have to get it right
On the pitch
The appointment of Comolli was the indicator of how FSG will be approaching football strategy. It is all about building a sustainable talent pool and investing in high quality youth. The issue many supporters will have with this strategy is that in being very forward-looking, it doesn’t address the right now. Comolli divides opinions amongst LFC fans, but I think he has a critical role in the club’s future. By increasing our revenue we will be able to compete financially, but we won’t be throwing money at it like City or Chelsea.
Player investment will always be dependent on club income. How we perform commercially will be essential to how we can compete. There is a huge amount of debate amongst LFC fans about the quality of our new signings, but we are going to have to get used to investing in youth under FSG. When investing in youth and building from the bottom up, you need a strategist in post that takes a 3-5 year view on player development and analysing potential. That is what Comolli is all about.
It is pointless judging Comolli (and Carroll/Henderson) right now, as the role Comolli has and the reasons the club invested in Carroll and Henderson are about looking at least three years ahead.
It may not work out with Comolli, but FSG favour a structure that drives sustainable and strategic player acquisition and youth development. In my view, that is how you build a successful football club.
Related article: The Comolli role
The FSG end game
The positive thing for Liverpool fans is that FSG don’t appear to be interested in dividends. They are interested in leveraging the club’s potential with a view to significantly increasing its value. As they have proven at the Red Sox, they are not afraid of the long haul which is unusual in private equity.
The business model FSG are using is all about sustainability. It is about increasing our revenue and building a strong financial performance. It is in the interests of FSG for us to be competitive on the pitch. The promising thing so far is that FSG appear to be sensitive to our culture whilst driving modernisation (unlike a certain other pair of Americans). In many ways our culture has been a barrier to modernisation for a generation. We have needed to make the transition to business since the inception of the Premier League.
Whilst FSG are in this ultimately for a big return, they also seem to be driven by winning and genuinely want to see us succeed. It is very difficult to predict how long FSG will be at Liverpool; but with the stadium solution and debt I would expect 10-15 years, possibly longer. What happens after that is anyone’s guess – maybe Henry would be open to a supporter bid in a similar model to Barcelona?
The FSG blueprint is all about building; they have made the initial investment, and I would guess they won’t put any more equity into the club. What happens now is down to us; how well we do on the pitch and off it will ultimately determine the value and profit FSG get back.
So it is in all of our interests to succeed. But it will take time: they may not be sheikhs, but if they get it right they could secure a successful future for the club for a generation, especially with FFP coming into force.
They have learnt from the failings of the previous regime, and they will be in this for the long haul.