Home Opinion

The scale of Fenway’s challenge at Liverpool becomes clear

22

Andy Green, of Anders Red Blog, provides an excellent analysis of Liverpool’s finances following the publication of the club’s accounts this week.

Liverpool are a club in transition on and off the pitch. The financial results published overnight show just how great is the challenge facing Fenway Sports Group (“FSG”). We can now see that the American owners spent £261m acquiring and refinancing Liverpool. Of this figure only £30m has actually flowed into the club, the rest was spent on the purchase itself.

I think Liverpool will turn the corner financially, the commercial opportunity is still there and there is clearly the scope to occupy a far larger/more profitable ground. The challenge is getting far more sporting success out of a very expensive squad of players, and that isn’t really down to money at all….

FSG’s ownership structure

The primary operating company of Liverpool Football Club is “The Liverpool Football Club and Athletic Grounds Limited” which the the main entity I will focus on. Since 15th October 2010, 100% of this operating company has been owned by a new vehicle “UKSV Holdings Company Limited”. UKSV is in turn owned by NESV I LLC, a US company also (and commonly) known as “Fenway Sports Group”. The accounts of UKSV only run from 1st October when it was established to 31st July 2011. The accounts of the operating business, which I’ll refer to as “Liverpool” or “the club” for ease, run for the year to 31st July 2011 (i.e. last season).

Ian Ayre’s spin

Before the club’s accounts were available at Companies House, Managing Director Ian Ayre gave a lengthy interview to the club’s website and to the Liverpool Echo. Without making the accounts available, Ayre threw around various numbers and in particular blamed the £50m pre-tax loss on a write-off of work on the abandoned stadium plans. Whilst the write-off had a big impact, he was being pretty disingenuous by not mentioning a pretty exceptional profit (£43.3m) on the sales of Fernando Torres and Javier Mascherano. This profit largely offset the stadium write-off (£49.2m) and that meant that the underlying results were very poor.

Ayre is not alone in spinning his club’s financial figures before they come out (hello Chelsea) or not being straight with his supporters (hello United and many, many others), but it is still pretty poor. The club is in transition and there is surely no need for such spin.

Revenues and costs

Football clubs are simple businesses. There are three revenue streams (matchday receipts, media income and commercial deals) and two main operating costs (wages and the costs of operating the club day to day). The difference between these numbers is “EBITDA” (earnings before interest, tax, depreciation and amortisation), effectively cash profits before any investment or the servicing of debts. After EBITDA come depreciation of the stadium, training ground etc, “amortisation” which is how transfers are accounted for, then interest and (rarely in football) corporation tax.

Liverpool’s results for 2010/11 show what happens when costs run ahead of revenues; profits collapse. This is of course the curse of football finance. Success brings income so clubs invest in player wages in the pursuit of this success. Fail to do well on the pitch and the costs are still there but not the income.

Liverpool’s revenue was effectively flat last season (down 0.5%). Matchday income fell 4.6% despite the same number of home games, reflecting a small fall in average attendances (40,224 vs. 41,940) more than offsetting ticket prices rises and must imply a fall of in corporate hospitality too. Media income was down 18% as the club failed to qualify for the Champions League (losing £25m of income). This was partly offset by £5m of Europa League income and the £6m increase in PL TV money from overseas rights. Commercial revenue was the star area with the Standard Chartered deal driving it up £15m or 25%. The Warrior kit deal will not impact the accounts until 2012/13.

Although revenues were down a fraction, there was significant cost growth as the club spent heavily in an attempt to break back into the top 4. Pre-exceptional staff costs rose a very punchy 12.7% year-on-year. This wage growth is more down to contract increases than transfers in my opinion. Although the club signed Cole, Poulsen, Konchesky, Meireles etc, Mascherano, Riera and Benayoun all departed and the January flurry of transfers will not have impacted the full year numbers significantly.

Total operating costs (pre-exceptionals) rose 9.3%, driving EBITDA before players sales down by 63% to only £9.8m, a margin of 5.3%. The graph below shows how the club’s EBITDA has fallen very sharply since 2009 revenue despite growing slightly. Liverpool are overspending.

The issue of rampant wage inflation is not of course unique to Liverpool. The graph below shows that Arsenal, Everton, United and City all saw wages rise faster than turnover last season. The problem for Liverpool is however more acute than at other clubs, fundamentally because Liverpool are operating a squad with a Champions League cost base without Champions League income.

Liverpool’s wage bill is quite competitive in Premier League terms, fourth behind City, Chelsea and United but the dreaded wages/turnover ratio is rising sharply (up to 70% from 62%). That puts Liverpool much closer to Chelsea (76%) than Arsenal or Everton (55% and 56% respectively).

Amortisation and depreciation

Amortisation is the method by which transfer spending is recognised in the profit and loss account. It reflects the level of transfer spending a club does, spread out over the life of player contracts. Importantly it forms part of the UEFA’s FFP calculation. At Liverpool the amortisation charge has been quite high, reflecting steady transfer spending under Benitez and Hodgson. The charge fell from £40m to £36m in 2010/11.

Depreciation (on Anfield and Melwood) was up slightly at £2.9m (vs. £2.1m).

Exceptionals, player sales and interest

Exceptional costs totaled £58.99m in 2010/11. Of this, £49.2m was a write-off of capitalised costs relating to the abandoned stadium project. It is important to stress that this is not a cash cost in 2010/11, the money had already been spent in previous years. Most of the balance of the exceptional charges relate to getting rid of Roy Hodgson. The club spent £8.4m changing managers last season compared to £7.8m getting rid of Benitez the year before.

The interest charge fell very sharply from £17.6m to £2.9m as the burden of Hicks and Gillett’s debts was lifted. It is worth noting that cash interest paid actually rose slightly.

Although not treated as an “exceptional”, the club recorded a huge profit on player sales in 2010/11. Such profits are calculated as the difference between the price at which a player is sold and his “book value”. Torres was acquired for around £20m and probably had a book value of around £10m when he was sold to Chelsea. That means the club recorded a profit on his sale of around £40m. Add in Mascherano and the “profit on player sales” was £43.3m.

Pre-tax loss

Bringing all these numbers together, Liverpool reported a pre-tax loss of £49.3m compared to £20m the previous year. The exceptional charges are unlikely to re-occur, but neither is the enormous profit on Torres. Estimating a “normal” profit on player sales is very difficult (the figure was £23m in 2010, £4m in 2009), but £10m looks a reasonable estimate for a club with Liverpool’s strong youth set-up. Stripping out the exceptional costs and using £10m for a “normal” profit on player sales implies an “underlying” pre-tax loss of c. £23m. The collapse in EBITDA means Liverpool are structurally loss making at these level of income and wages. To change that of course, the club need cheaper players or more revenue.

Cash(flow) is king

Accounting items like non-cash exceptionals, amortisation and player sale profits can often make the profit and loss account of football clubs misleading. It is always important to focus on cash flow as shown in this table:

The collapse in EBITDA (here including cash exceptionals), led to a very sharp fall in operating cash flow at Liverpool. Unlike in the P&L, the transfer spending here reflects actual cash spent and received and with the Carroll spending paid up front but the Torres receipts staggered, there was punchy £40m of cash spending in 2010/11. Deduct interest and the club saw a £42.5m outflow before financing.

It goes without saying that Liverpool need to generate more EBITDA and hence cash flow to be able to compete in the transfer market in the future or will need subsidising by FSG.

Debt and financing

Of the £42.5m cash outflow shown above, £26m came from an injection from new parent company UKSV and the balance from running down the club’s cash balance (which fell from £19m to £2.5m).

The £30m “debt” on the Liverpool balance sheet owed to UKSV/FSG is really equity by another name (it attracts no interest). At 31st July there was a real bank loan of £37.7m (the “stadium finance” part of a larger £92m facility with RBS and Wachovia/Wells Fargo) secured on the club’s assets.

On 30th September 2011, the club entered into a new £120m facility with RBS, Bank of America and Barclays for £120m. The facility runs for three years. £45m is the stadium project facility and £75m for “general corporate purposes”. Whilst with year end debt of only £37.7m there might appear to be plenty of spare capacity, football clubs’ cash positions are highly seasonal and the club will definitely need this facility during the course of the season. We do not know the interest rate on this debt (the old facility was LIBOR +450bps).

Prospects and thoughts

Fenway have a very big challenge keeping Liverpool competitive in the next few years. The Warrior kit deal next season will add c. £13m (7%) to revenue, but there was no Champions League football in the current season and there won’t be any next season. Wage inflation across football remains endemic despite the imminent arrival of FFP. The playing squad needs investment and a new ground is desperately needed.

If all that wasn’t bad enough, the competition for CL places is far fiercer than it was in the good old days of “the big 4″. A £100m+ wage bill used to guarantee qualification for the CL, now it barely guarantees qualification for the Europa.

The great unknown in all this is the willingness of FSG to invest their own money in Liverpool FC. So far £30m has flowed in on top of the cost of acquiring the club. The expansion of the banking facility very much suggests that the business will be debt not equity financed in the next year or two and that is a worry.

Despite all this gloom, I think Liverpool will negotiate these financial risks, for two reasons. Firstly as shown by the Standard Chartered and Warrior deals, the club is a big brand still on the global stage. It is commercial success that has allowed United to compete despite its debt burden and remains a key advantage for Liverpool too. Secondly, there is significant scope to expand matchday income if a new stadium can be developed. Liverpool L4 is not London N5, but Arsenal’s move to the Emirates gives a flavour of what can be done. Liverpool’s matchday income is only 37% of United’s. FSG need to close some of that gap.

The other thing Liverpool need is for Financial Fair Play to be rigorously enforced. This is the great unknown of course, but FSG have clearly made a bet that it will stick.

Taken together, the Liverpool “project” is a steep, steep challenge.

Share with your friends









Submit
The following two tabs change content below.
Anders Red is a Man United blog, whose author is a fund manager in the City of London with 15 years experience of investment analysis.
  • Gladstone

    To be quite honest, that’s a fairly depressing picture.

  • Guest

    It’s a freaking depressing picture. 

    Torres profit sale as one-time thing. While Andy, Downing, Adam, Hendo, Suarez, Enrique costs spread out at 120 mils/5 = 24 mil annually for the next 5 years. So if we assume every financial item remain the same next year, we will lose:

    50(current debt)- 35(stadium)+ 43(player sale last year) – 15 (player sale this year/ last summer) + 24 mil(CHAD, Enrique and Suarez)= 63 mil in debt next year

    Of course we still have deal like Warrior Sport and such to offset, and hopefully the wage bill will be lower. However we also lost all profits from Europa this season (compare to last) and then gonna need more transfer movement to recover from this 8th. 

    To summarise: instead of inventing heavily into the squad, we may see Suarez, our biggest assess sell this summer to fill in that 63 mil lost. The worst case scenario 

    • Guest

      Oh, and spare me the spelling mistakes, were talking when typing above

    • Guest

      Where the hell did you learn to add up???? £24 million over 5 years for what? The accounts published go up till July 2011, Adam, Henderson, Downing and Carroll all paid for in this set of accounts, if anything not all the Torres money and the money we recouped late in the season on sales such as Meireles aren’t included. If we had kept Torres and not bought Carroll then this set of accounts would look £15 million worse not £50 million worse if thats what you are getting the £50 million figure from because the debt is £30 million and does not need to be paid in the summer like you say. Sorry but really can’t make head nor tail out of your post. I read the accounts as; Last year - £50 million + nearly £10 million as won’t need to replace Roy and coaching staff + nearly £50 million that we won’t lose on next years accounts as there won’t be any stadium costs written off on them +  increased commercial revenues + money saved by lowering the wage bill – the small amount of revenue lost by not being in Europa League + the small amount of money earnt for the domestic cup runs and trips to Wembley = party time this summer!!!! Will have a comfortable amount of money will just be a case of who we will be able to attract or not being in Europa League instead of Champions League but as a club we have a pretty topsy turvy (to say the least) record when it comes to marquee signings I’d much prefer us to concentrate on good young talented players who can come in with little fan fare sneak in under the radar with no expectations and pressure and just quietly settle and become effective options in the squad.

      • Guest

         Not an expert on this so can’t say for sure here.

        But to my understanding, the financial account is not in term of cash flows, so assets like machinery (or players in this case) are depreciating items for the duration of their usage/contract. It means when a player worth 35 mil is bought for 5 years contract. In term of financial book, it will be counted as the club paying 7 mil each year for the next 5 years, even when a lump of 35 mil is paid up front.

        In that way Carroll is currenly worth 25.5 mil asset and in the financial book, we will still have to pay this much for next 4 years. So if we can sell him for 25 mil in the summer, even through we get 25 mil in cash, in the financial sense, we gain nothing, but don’t have to pay 25 for next 4 years.

  • sideshow_bob

    Great post. Ultimately, this is a test of FSG’s commitment. I like to think that I am realistic and I don’t expect owners like FSG to be continually pouring hundreds of millions of pounds into the club. However, if they think that a couple of transfer window’s worth of investment based on debt and player sales is enough to get Liverpool back in the top four and keep them there, then are they really that different from Hicks and Gillet? 

  • Guest

    Think you have looked at a few things out of context.
    You say the exceptional stadium write off is a one off and that so is the huge profit on Torres explaining they cancel each other out but without taking into account that the Torres money is the reason our spending on players was so high.
    For instance if we had of sold Torres for £25 million we would of limited ourselves to £10 million on signing a replacement (and yes I know those figures are unrealistic, just using them to make a point).
    So for me Ayre is right with his conclusion and you are incorrect with your reasoning.
    The stadium costs they wrote off WERE a one off finance.
    The finance for the other stadium project and the redevelopment of Anfield are both still there so both projects are good to go when one is selected and then one will have to be ‘released’ on a future set of accounts, that is the only future red herring I can see.
    The player costs will largely balance out much like last year with maybe 25 to 40 million extra ‘transfer kitty’ spent on incomings on top of the cost recouped from outgoings, again like last year.
    The stadium write off won’t occur in next years accounts, increased revenue and diminished wage bills will both show up.
    You paint a bleak picture on a financial year that involved 3 months under the crooks (as you say we were running at a £20 million loss the way the club was running previously), an expensive acquistion and restructuring of the club and YET if read in the right perspective the finances would be A-OK without the stadium issue, which the new owners (if they were as sneaky as you suggest) could have kept on the books till later, they’ve actually been incredibly honest and transparent.
    It’s also important to remember this is July 2010 to July 2011 we are nearly at Jully 2012 and know that this years accounts will show highly increased revenue and significantly lower wage bill than the previous year without any of the big costs like the staff turnover and stadium costs so I think next years accounts will show a lot better.

  • Viewpoint_X

    Fcuk sake!! Why post that the day before the Cup final? Could you at least leave that depressing shlte until the Cup final was over. Christ!!

  • Michaelmorris62

    I am surprised no-one said it: thanks for a great explanation. We are not all accountants and this was very clear.
    It may or may not be depressing, but the current financial model of football is untenable.

  • Ross

    This is why I find it disgusting that Kenny Dalglish has spent so much much money on such terrible players! Money has to be spent wisely, every penny is important for our future.

    £120m down the drain!

  • JJ

    With this trend LFC will certainly become the next Nottingham Forrest! There is a sense of urgency an the owner has to act quickly.

  • MR GRUMPY

    Lets face it if the yanks are after a quick buck they have come to the wrong place I wish they would sell to some rich Russian, Chinese, or Arab who have the finances to compete with the best, all we have heard from the yanks from they first became involved is money,money, money, the fact is they got the club for a snip and are trying to compete with the best without making the huge financial injection needed, and if money has been wasted it,s their fault they own the club and it is up to them to ensure money is spent wisely, sadly the fact is clear until the club is owned by someone who can afford to make the finances available to compete with the best we will be struggling, and its no use saying we wasted money on this player or that player it happens at all the major clubs,some players just don,t fit in no matter how good they are, I still think big Andy will prove to be money well spent in the future.

    • Bomber25

      Charlie Adam, Downing, Henderson have all been disappointing signings. They have so far been a waste of very good money.

  • Iangorby

    Fenway are venture capalist they dont care about club fa cup semi final point in view they are here to make money for themselves. 18th months no stadium point taken. sell up to a chinese consortium who have money to invest good bye yanks yet again. Commercial end of this club is still a joke 

    • guest

      agree totally. they are no different from H&G. just less stupid and crude. which is worst! the end game is always the same. LFC global fan base are suitble for a rich billionaire to sustain not these penny pinches trying to sell a new brand of snake oil (moneyball/sabercraptics). the convenient excuse of looking for a naming rights for the stadium is laughable and an insult to the fans. just quickly sell up before the clubs becomes less desireble for a rich owner to come in.

      • http://twitter.com/PeterMcGurk Peter McGurk

        How long did we look for a ‘rich owner’? And how many did we find?

  • Peter McGurk

    It’s a fair and realistic assessment of the situation. In the absence of bank-rolling mega-wealth, it is exactly the same situation for any club that wants to challenge for success at the top of the game with the largesse of the super cash-rich. In essence the pre-exceptional issues would no different to any other at this level.

    Of course the elimination of the unfair ‘bank-rolling mega-wealth’ to produce a level playing field for all is precisely FFP’s target. Its success or otherwise will be the make or break of the game.  No less.

    FSG would be fully aware of that coming in. They know this is the challenge. They know they have to beat the sugar-daddies without being one. They know they have to expand revenue in all directions (broadcast, commercial and matchday) without the benefit of being able to throw money at the problem. And we know, there were no other serious contenders. 

    FSG have already begun to address some of the issues presented. Particularly squad costs and especially debt costs. The reduction of actual debt costs is already a legacy for which they might be thanked rather than chastised. 

    Indeed, the impatience shown to FSG in some quarters is juvenile (are we there yet?). This in comparison to the views stated here, which after all are ultimately optimistic. So, a bit of support for the owners who have made a good start, hey lads?

    • Peter McGurk

      Clearly that is without the largesse of the super cash rich – apologies

  • Peter McGurk

    It’s a fair and realistic assessment of the situation. In the absence of bank-rolling mega-wealth, it is exactly the same situation for any club that wants to challenge for success at the top of the game without the largesse of the super cash-rich. In essence the pre-exceptional issues would no different to any other at this level.

    Of course the elimination of the unfair ‘bank-rolling mega-wealth’ to produce a level playing field for all is precisely FFP’s target. Its success or otherwise will be the make or break of the game.  No less.

    FSG would be fully aware of that coming in. They know this is the challenge. They know they have to beat the sugar-daddies without being one. They know they have to expand revenue in all directions (broadcast, commercial and matchday) without the benefit of being able to throw money at the problem. And we know, there were no other serious contenders. 

    FSG have already begun to address some of the issues presented. Particularly squad costs and especially debt costs. The reduction of actual debt costs is already a legacy for which they might be thanked rather than chastised. 

    Indeed, the impatience shown to FSG in some quarters is juvenile (are we there yet?). This in comparison to the views stated here, which after all are ultimately optimistic. So, a bit of support for the owners who have made a good start, hey lads?

  • http://pulse.yahoo.com/_UJYLBB2ZRSIY6NBILZ7PSHZUTY Jon J

    So now Koppites are expected to grapple with the intricacies of profit and loss accounting – as if they were a bunch of Americans…?

    Look, FSG ARE Americans, and all they understand is money. Certainly not football, a game that plays no real part – nor ever will – in the US sporting calendar…!!

    FSG are gonna walk – and PDQ!

    It may not be next season – it may not even be till the season after that. But walk they will…! They’re Americans and football’s not in their blood.

    But even Americans – especially if they’ve invested money in it – know very well that the object of football is to score more goals than your opponents. And it’s guaranteed that they must, by now, have already concluded that Liverpool – a club they’ve not only been persuaded to put money in and will therefore have been told was once, long-ago, a legendary force and the veritable font of all football – is now jam-packed with so-called ‘players’ most of them utterly worthless, who probably never knew how to score a goal in the first place, or can’t remember how, or have completely lost the will to score one even if they did.

  • http://pulse.yahoo.com/_UJYLBB2ZRSIY6NBILZ7PSHZUTY Jon J

    By the way – there is no way Liverpool is EVER going to see a brand new stadium. Surely we all know that by now, don’t we…??? If not, stop kidding yourselves.

    The tragedy is, if only it had been built – (or at least started…!) – FSG, or whoever put the money in, would now have been determined to see a return on their capital (minimum of half a $Billion) and therefore may have stuck around, maybe funded some decent players. As things are, FSG will soon walk away from their Liverpool adventure – perhaps with their fingers burnt but counting what, to them, will amount to little more than a small-change loss.

    • http://twitter.com/PeterMcGurk Peter McGurk

      Well, every cloud…