27 October 2008

Liverpool finances

from Political Economy:


"Liverpool fans will be celebrating today's victory at Chelsea. The club has had its best start to its Premiership campaign for many years. The red half of Merseyside can realistically talk about securing the Premiership title. Off the pitch, things are less rosy. Of course, what with a holding company in Delaware (the state with a reputation for business friendly rules) and a Cayman Islands tax haven link, the corporate arrangements of the current owners would not win a prize for transparency. It would appear that Gillett and Hicks funded their initial purchase of the 'franchise' with a £298m loan from the Royal Bank of Scotland and American bank Wachovia. £174m of that money was used to buy the club from existing shareholders, a deal that brought David Moores, last of the family line to run the club, a cool £90m.

The initial loan was replaced in January by a £350.5m facility with the same banks. The plan was to load the whole debt on the football club, but chief executive Rick Parry and Moores (now honorary life president) invoked a 'whitewash clause' that required all board members to agree on debt deals. The compromise that was agreed was to let the football club have £105m, much of which has been used to buy players. The remaining £245m then sat with the Delaware holding company, Kop Football. The rates on these loans are about nine per cent a year so they will cost the club £25m a year. This is broadly equivalent to the revenue raised by last season's run to the Champions League semi-final. European performance generally represents the difference between breaking and even and making a profit at the club.

Supporters are concerned that the requirement to service debt will inhibit transfer spending, and could eventually prove impossible to sustain from current revenue. Share Liverpool, the supporters group with aspirations to buy the club on behalf of the fans, have used well regarded financial modelling software to forecast the club's financial performance. They predict annual losses of between £30m and £70m over the next five years as player costs increase. One note of caution is that the credit crunch could actually lead to a reduction in transfer fees and wages as clubs are less active in the market (see Chelsea story below). Share Liverpool argue that, on their figures, the club do not have a large enough stadium or commercial income to support their player and debt costs. Hicks and Gillett dispute these projections, which do seem a bit like worst case scenarios, and point to recent commercial deals with Paddy Power and Thomas Cook worth £10m as evidence that they are enhancing the club's commercial appeal.

Ultimately Liverpool's ability to compete on the highest level depends on moving to a new stadium, a project that poses the most serious questions about the stewardship of the current owners. They insist that their plans for a 75,000-seat stadium are on hold only until the worst of the banking crisis is over - although a global recession may make lenders unwilling to fund this type of project. What is not clear is where the £300m - £400m for the Stanley Park stadium is coming from. They already face the challenge of refinancing their loans next July, and it is difficult to see how they will be able to secure the debt against the club without providing fresh capital. Until they do, critics will argue that they are caught in a Catch-22 of their own design. Without a new stadium and the revenue streams it will bring, they cannot clear their acquisition debt, but may be unable to build one because of an inability to raise fresh finance.

So what will happen? In more difficult financial times, the idea of a shared stadium with Everton - which many figures in public life in the north-west favour - is bound to be revived, but it would raise a storm of protest from fans of both clubs. It may well be that Dubai Investment Corporation will yet buy the club once the financial position in the Gulf state is clearer. At the moment, there is some concern about a level of debt which is said to be near that of national GDP, as well as the slowing down of the property boom. However, it is believed that the acquisition of Charlton was stopped by the head of the royal family because he feared that its effective ownership by his son (albeit operating through someone else) would raise 'conflict of interest' issues which would threaten the purchase of the greater prize of Liverpool. I am far from sure that the conflict of interest rule would have stood up to a well funded court challenge, but in the present climate of questioning foreign ownership, that is publicity Dubai's rulers could do without. They care about their reputation which is one consideration that should endear them to 'Pool fans. Certainly, I would have been delighted to see them own Charlton."

Brad Evans