Nicked from RAWK A Leverage Buy Out, How Liverpool FC has fallen victim to a cruel financial instrument The term Leverage Buy Out was not really synonymous with a football fans dictionary until 2005 when two American businessmen strode into Manchester United amid fractious opposition from the club’s supporters. They disagreed wholeheartedly about The Glazer families plan to leverage the club up to its eyeballs in debt, so that their purchase was bought and paid for by the club. It was a similar story down the road at Liverpool, when Tom Hicks and George Gillett swept into Liverpool amid a slick trail blaze of slick PR. “This will not be a takeover like Manchester United”, Hicks procured nonchalantly, meanwhile his business partner, George Gillett, proclaimed that “there would be a spade in the ground within 60 days” for the new stadium. Shortly after their arrival things began to take a turn for the worse, when suddenly their slick spiel suddenly seemed more hollow than an Easter egg, after it was announced that their takeover had, in fact, incorporated large amounts of debt onto the club. To date there is still no sign of the new stadium that was promised by them, and which the club so desperately needs in order to compete with its rivals. In typical terms, LBO’s usually operate in the following ways. A buyer purchases an organisation with money that is borrowed from the banks. These borrowings are then loaded onto the holding company, which usually have only one asset, the business itself. The organisation then becomes responsible for the servicing and liability of the debt, with the buyer usually throwing down some of their own personal guarantees just in case things go wrong. The period after the purchase usually coincides with a period of intense structural change within the organisation, as operating expenses within the company are drastically reduced, usually in the form of job losses and various other cutbacks. On the whole scale of things it is useful to think of this as an illusion, as the reduction in operating expenses transpires into higher profitability. This achieves two purposes. Firstly, it allows the organisation to meet its obligations more easily, and secondly, it allows the business to showcase its apparent exceptional performance to the market place, making it ripe for any takeover. However, behind the illusion lies a different story, not one of exceptional performance, but one of severe structural difficulties. Any organisation needs to be aware of its competitors and therefore manage the company accordingly. By reducing operating expenses investment for the future is limited, as anything other than the necessary operating procedures are shelved, which often results in a firm being unable to maintain its competitiveness in the marketplace. For example, it maybe that the advertising department is downsized, investment in new technology and research and development curbed, resulting in an out of date product base, and an uncompetitive pricing model compared to other competitors. The company then begins to lose its market share as the illusion of profitability, and meeting its financial liabilities take precedent over the long term viability of the company. This means that when that when an organisation is sold, it is often left with problems, flooded with debt and facing severe structural and cultural difficulties. Should the debt be paid off in any future sale, the intangible damage to the brand may already have been done, due to a lack of investment, which decreases its competitiveness within an ever changing market place. How does all this add up in the case of Liverpool FC then? In football, LBO’s are difficult pull off because of the competitive forces that operate within the football industry. It is quite difficult to rationalise a football club due to the tight relationship between revenue and success. What, it seems, Tom Hicks and George Gillette wanted to do was create the illusion that the LFC had a bright and prosperous future by setting the wheels in motion for a new 65,000 seater stadium on nearby Stanley Park, that would have allowed them to move the club on to the next bidder sometime during the construction process for treble what they had paid for it, while at the same time allowing the money loaned for the purchase to be paid back to the bank. The short term nature of the loans that they secured seems to add credence to this theory. While all of this was going on, some investment was made in the squad to keep things ticking over as during the summer of 2007 Fernando Torres, Ryan Babel and Yossi Benayoun were all purchased, albeit with the help of a working capital facility of 105m that was provided alongside the 245m purchase facility provided by RBS to the club. However, the plan went to the wall when funding could not be secured for the new stadium due to the global financial crisis, and later LFC’s exposure to debt. The bank began to worry that this was more junk debt, and began to become increasingly concerned about the ability of the club to meet its obligations, given the amount of money that Hicks and Gillette have had to plough in via off shore companies in the Cayman Islands just to keep the club solvent. This money has been used to absorb the losses of 42m and 54m that the club has posted in both sets of accounts released since the arrival of the Americans in 2007, as well as some equity that they have put in themselves to pay for the 45m repayment that RBS demanded last summer, as a stipulation of the refinancing package that was secured from the bank last summer. Last summer RBS wanted 45m paid back, this summer it was 100m, and now the deadline appears to be March 2011 with the full amount having to be paid back by then. Hicks and Gillette are now haemorrhaging money into the club, with the last account showing a total of 144m ploughed into the club by the owners, and the holding company posting losses of 54m. With no more money to call on from the working capital facility, and the owners unwilling to put any more money in themselves, there is no new money to buy players, and subsequently competitiveness has been lost causing the club to miss out the lucrative revenue from Champions League place. The club is now stuck in a negative cycle of growth, with doubts surrounding whether any sale price will allow the club to meet its liabilities to the banks and to Cayman. Even then there are fears that the Cayman money will be an outstanding liability on the books of the club. This is a real possibility given that the loans have not been converted to a share issue, which would suggest that they will not be taken care of in any subsequent sale, and that any new owner will be left to service the debt with crippling interest rates, unless any new owner pays it off in full. This remains hard to envisage given that any buyer would then have to stump up somewhere in the region of 400m+ to buy the club, plus the money required to take the club out its negative cycle of growth by purchasing players. However, even this is complicated due UEFA’s new financial fair play initiative which limits benefactor investment in players to 38m over a three year period from season 2012-13. Given the competitive advantage that Manchester City and Tottenham currently have over the club, together with the absence from the lucrative Champions League, plus the superfluous amount of money needed to propel the club back into a competitive, not to mention stadium funding, it is hard to envisage any bids of 400m for the club forthcoming. Given the situation, if the club cannot raise the money to pay its crippling gross debt back which stands at 395m, then there are genuine fears that officials will seek to raise money by cashing in on the club’s saleable assets. It is horrible writing this, and it’s horrible for any you reading it, because this isn’t what football should be about. Involvement in a football club should be a leisure pursuit, not an academic activity where the fans study financial scenarios of the club. Football has lost its soul, and clubs with decades of rich history and age-old tradition are being destroyed by the money men. In an era of aloofness, fans are treated with utter contempt by the officials that run these institutions, of which carry such an intense emotional attachment for the supporters who pay money each week to support their team. Everything in modern football is buttressed from the fans, with directors concealing from information that they wish to know regarding the club, and they are often kept in the dark over any changes that impact upon them, despite the rhetoric “We'll never take our fans for granted” that is usually wheeled out during times of difficulty. Supporters are just expected to keep on oiling the club's coffers, while officials remain distant, with fans considered a nuisance and a hindrance when they have the audacity to ask for an honest and open appraisal of the club’s health. This week Spirit of Shankly released a set of questions that they want answers to regarding the financial health at the club and the role of the newly appointed managing director, Christian Purslow. There is currently a theory circulating that Mr Purslow’s appointment last year has more to it than meets the eye. He was appointed to the board in order to source investment for the 100m that the banks wanted paying back this summer. That deadline has now passed and has been extended until March 2011, with the full loan facility now due for repayment on this date. However, Purslow’s arrival on the scene is more than a little bit bewildering given that he has no previous experience in football, and suddenly he is running football affairs, sacking managers and buying and selling players, despite his previous professional background being based around finance and in particular the management of hedge funds. However, his arrival on the scene might have something to do with a company called Mid Ocean Partners, a private equity firm, of which Christian Purslow was a founding partner. The firm has recently expanded its investment platforms to include an offshoot firm that invests in bank loans and bonds called MidOcean credit partners, and a company called KSA MidOcean which is a hedge fund. It is feasible that Mr Purslows arrival at the club is connected to MidOcean, and the possibility that the firm played a key role in the refinancing that took place last summer and March this year, by investing in the bank loan that RBS lent to the club. This would certainly explain his arrival to the board. What happens next is anyone’s guess, and there are a number of potential scenarios. One of these include refinancing the RBS loan with hedge funds with high interest rates should no suitable buyer be found, and another being selling off some players in order to pay down some of the debt, so that the club can be acquired for cheaper price. This could act as back way in for Purslow’s company Mid Ocean to invest officially in the club, maybe through a hedge fund via one of their offshoot investment platforms. According to the MidOcean website they are a company that “identifies opportunities in sectors chosen based upon macro and micro trends”. In order to recoup the debts by selling the club’s key assets they could potentially acquire the club for a much lower price through, firstly, a reduction in overall level of debt, and secondly, through the declining market value of the club due to its poor competitiveness as a consequence of selling key assets. This would also fit nicely into MidOcean’s investment strategy of acquiring businesses based upon their macro and micro trends, with competitiveness being a micro trend. Liverpool FC does not exist as a football club anymore; it’s a financial minefield which is being negotiated by city institutions and ruthless businessmen, with the supporters being kept in the dark over the precarious situation. It is about time that the fans are informed with regard the health of the club. This should be done face to face with whole hearted honesty, rather under the auspices of the club in a controlled environment, which attempts to put more spin on things than David Cameron at one of his political rallies. Supporters shouldn’t just be tasked with ploughing money into the club, they deserve more than this, transparency being the very least. However, to conclude, we must ask a more pertinent question regarding leverage buy outs, why are they openly accepted despite the fact that they completely contradict the business model of the Premier League. The league claims "At the heart of the Premier League’s sporting and business model is an investment virtuous circle-the quality of matches leading to popularity, leading to high income, leading to further investment and thus further improvement in the quality of football, of the stadia, and of talent development". It’s galling that given the principles of the league that LBO’s are allowed as a consequence of its ownership neutral model. It’s a paradox of the Premier League that its success has attracted LBO artists, yet the presence of the LBO model may ultimately be the death of two of the teams, Liverpool and Manchester United, of whom bring the league so much commercial success in the first place.
