Wednesday, May 26, 2010

UEFA Say Fair Play To Arsenal

Some time tomorrow in a nondescript, modern building overlooking Lake Geneva in Switzerland, football’s great and good, also known as UEFA’s Executive Committee, will meet to implement the snappily titled Club Licensing and Financial Fair Play Regulations. This vision was first given the green light in UEFA’s September 2009 meeting and they are now expected to approve their March 2010 draft proposal, which requires clubs to break-even from the start of the 2012-13 season, if they wish to qualify for European competitions like the Champions League. In the slow-moving world of football bureaucracy, it is striking how quickly UEFA has managed to translate the initial concerns of President Michel Platini, who had described clubs borrowing to buy sporting success as “financial doping”, into a practical, workable document.

UEFA’s aim is no less than “protecting the long-term viability and sustainability of European club football”. Under this financial fair play concept, clubs will have to balance their books and operate within their financial means, thereby helping restore stability to the European game. Clubs will be required to spend no more than they earn to “introduce more discipline and rationality in club finances and to decrease pressure on players’ salaries and transfer fees.” They will be forced to settle their liabilities on a timely basis, but will also be encouraged to invest for the good of the club in areas such as youth development and infrastructure (stadium, training ground).

"Only thing bust about Arsenal"

This is probably all beginning to sound very familiar to Arsenal fans, who have observed the club investing in these themes over the last few years, but wait, it gets even better. In order to ensure a level playing field, UEFA have also targeted the influence of wealthy benefactors. General Secretary Gianni Infantino baldly stated, “It will not be possible for the big sugar daddy to just write-off a cheque at the end of each season”. President Platini went further, encompassing clubs financed by mountains of debt, when he called the initiative the end to “success on credit”.

In recent seasons, many clubs have reported repeated financial losses, which have been getting worse. The wider economic situation has created difficult market conditions for clubs in Europe, negatively impacting revenue generation and creating additional challenges for clubs in respect of availability of financing. Many clubs have experienced liquidity shortfalls, for instance leading to delayed payments to players, other clubs and even the tax authorities (Portsmouth) with auditors questioning the ability of some to continue as a going concern (Liverpool, Hull City).

In February UEFA published a mighty tome entitled “The European Club Footballing Landscape”, a financial survey of more than 650 clubs all over Europe, which contained some jaw-dropping statistics. Gianni Infantino reported, “We found that 50 per cent of those clubs are making losses every year, and 20 per cent of them are making huge losses, spending 120 per cent of their revenue every year.” He said that the primary reason for the losses is wage and transfer inflation, driven by clubs relying on owner finance or debt, “Around one third of the clubs are spending 70 per cent or more of their revenues on wages. Revenues across European football grew by 10 per cent last year, but the salaries of players and coaches have gone up by around 18 per cent.”

"Gianni Infantino looking through the books"

While such over-spending “may be sustainable for a single club, it may be considered to have a negative impact on the European club football system as a whole.” As Infantino said, “The problem is that all clubs try to compete. A few of the biggest can afford it, but the vast majority cannot. They bid for players they cannot afford, then borrow or receive money from their owners, but this is not sustainable, because only a few can win.” In other words, the richest clubs drive up players’ salaries and transfer costs, forcing smaller clubs to over-stretch their budgets to compete. Intriguingly, UEFA’s draft proposal states, “clubs will therefore be assessed on an individual basis as well as in the wider context of the European club football environment.” Not sure how they are going to achieve that, but it sure sounds good.

Debt may be a four-letter word for UEFA, but apparently loss is an even worse one, as the break-even requirement is described as the “cornerstone” of the new regulations. Gianni Infantino again, “We are not speaking about debts. We are speaking about losses. Debt per se is not necessarily a bad thing. The problem with debt is the cost of the debt, for example the interest you have to pay, and this can create a loss. We are focusing on the losses.” The key principle is that a club should always aim to at least break-even excluding expenditure for the long-term benefit of the club and must not repeatedly spend more than the income it generates.

So how do England’s finest fare under the new regulations? Of the seven teams that qualified for Europe this season, four of them fail to break-even – and by a long way. As we can see in the table above, Chelsea, Manchester City, Aston Villa and Liverpool are the offenders. This should come as no great surprise, as three of those clubs are funded by rich owners, most obviously with Roman Abramovich at Chelsea and Sheikh Mansour at Manchester City, but also to a lesser extent with Randy Lerner at Aston Villa. In marked contrast, Liverpool are not, having to bear the considerable burden of loans arising from the Hicks and Gillett takeover, which resulted in £40m interest payments last year.

That leaves just three clubs making a profit (Arsenal, Manchester United and Tottenham), but even this is misleading and over-states the situation. United’s profit only arose after last summer’s £80 million sale of Cristiano Ronaldo to Real Madrid, which is hardly likely to be repeated every year. Without this once-off factor, United would have reported a hefty loss thanks to their crippling £70 million interest payments. Despite this, United’s Chief Executive David Gill has claimed that the club would not fall foul of the new regulations, “We have seen what the proposals are and we would meet the financial break even rules.” Hmm. His confidence was not shared by the club’s bond prospectus, where the risk factors included the following, “These rules are intended to discourage clubs from continually operating at a loss. There is a risk that, in conjunction with increasing player salaries and transfer fees, the financial fair play initiative could limit our ability to acquire or retain top players and, therefore, materially adversely affect the performance of our first team.”

"David Gill - trust me, I'm an accountant"

What about Spurs? Although they don’t have to make huge interest payments, they are actually in a similar position to United, as their profit was only due to significant player sales of £57 million (Dimitar Berbatov to United and Robbie Keane to Liverpool). Without this, they would also have made a loss. Indeed, in the subsequent interim accounts for the six months up to 31 December 2009, Tottenham reported a loss before tax of £8.3 million. It looks like Harry Redknapp is beginning to work his magic on another club, as the impact of all his player purchases begins to bite. Sooner or later, this strategy will feed through into higher player amortisation, as, like all clubs, Spurs have to capitalise the cost of acquiring a player and then write-off that cost over the period of the player’s contract. To place this into context, Tottenham’s amortisation costs of £38 million are higher than United’s, but their revenue is only 40 per cent of Old Trafford’s franchise.

No, the only one of these clubs that is genuinely profitable is Arsenal, even after excluding the money made from property sales. Again, this should not raise too many eyebrows, as UEFA had already advised that Arsenal was the only major English club that would meet the financial fair play criteria today.

"Away From The Numbers"

The more financially astute will already have noticed that UEFA’s break-even template is subtly different from a regular profit and loss account. As they almost said on Star Trek, “It’s a P&L, Jim, but not as we know it.” The UEFA template introduces the concept of relevant income and expenses, which looks complicated, but is essentially a variant of the good old “carrot and stick” incentive that tries to achieve two goals: (a) encourage clubs to make sensible long-term investment; (b) close any loopholes which might allow clubs to artificially meet the break-even target.

Let’s take the positive aspect first. Clubs will still be permitted to borrow for “good” projects like improving the stadium or training facilities. Any costs associated with this investment, like interest on loans to fund the construction or depreciation on the resultant fixed assets, are excluded from the break-even calculation. In other words, an excess of expenses over income may still be allowed if the excess is solely related to costs that are for the long-term benefit of the club. As Infantino explained, “We are also saying losses can be admitted, if the money is invested for long-term purposes — developing a youth academy for example or infrastructure. This of course can lead to a loss in the short-term, but in the long-term it will be beneficial for the club, help increase the revenues.”

So the costs of building the Emirates Stadium would be removed from Arsenal’s relevant expenses, as indeed would the depreciation. Eagle-eyed observers will have noticed that this guideline appears to greatly benefit Manchester United, as they can deduct £44 million of depreciation and amortisation, largely because they report £35 million amortisation of goodwill. In accounting terms, goodwill arises after the acquisition of a subsidiary and represents the difference between the purchase price and the fair value of the net assets. This is capitalised like any other asset and amortised over the estimated useful economic life. This deduction makes a huge difference to United’s profitability. Maybe this is why David Gill was so confident of United meeting UEFA’s new regulations?


On the other hand, UEFA are clearly no mugs, as they have addressed some of the more obvious ways of getting around the new regulations. Many clubs these days have an intricate inter-company structure and there were fears that a club like Liverpool could argue that the football club was profitable, as their massive interest was paid out of the club’s holding company. Clearly, that does not make sense to any reasonable man and UEFA have caught that one, “For the calculation of relevant expenses, management must include any expenses incurred in the reporting period in respect of the activities of the club that are not otherwise recorded in the audited annual financial statements of the reporting entity that forms the basis for preparation of the break-even calculation.”

Next, they have anticipated the possibility of a wealthy owner paying a ridiculous £200 million to sponsor his team by embracing the concept of “related parties” and “fair value” so beloved of tax authorities when reviewing inter-company transactions. In short, if an owner over-pays for services, this income will be adjusted down to a fair value, i.e. what the club would have received if the transactions were conducted on an “arm’s length” basis. Enough tax jargon for you? The guidelines list specific examples like sale of sponsorship rights and use of executive box, but I wonder whether this regulation might also apply to interest-free loans? After all, banks don’t usually provide loans without charging interest.

UEFA wish to exclude any income and expenses from non-football activities, which are “clearly and exclusively not related to the activities, locations or brand of the football club”. This might be a factor for Arsenal, as any profit made from future property sales at Highbury Square, Queensland Road, etc would presumably be excluded from the break-even calculation. On the other hand, this might benefit a club like Barcelona, if they can eliminate the £24 million losses they make on other sports (basketball, handball and hockey).

However, you would not expect UEFA to be too tough on their meal ticket and, sure enough, they revealed the velvet fist inside the iron glove by making a number of concessions to Europe’s top clubs. The most significant is that there will now be a phased implementation over five years. The scheme will still kick-off (if you’ll excuse the pun) in 2012, but there will be a three-year transitional period and it will not be fully operational until 2015. As David Gill said, “If clubs are not complying now, then there is time for them to get their house in order.” Or, as cynics might say, there will be time for clubs like Manchester City to accelerate their spending before the regulations take full effect.

Furthermore, in the same way that British transport classifies trains as being “on time” if they are only ten minutes late (or something like that), UEFA have stretched the definition of break-even to include an “acceptable deviation”. Losses that are not underwritten by club owners are allowed up to a total of €5 million over three seasons. To be fair, Infantino’s explanation makes sense, “You can have losses for one year, because perhaps you had one bad season and you did not qualify (for Europe). So we are looking at losses over a multi-year basis. So one year you can make a loss, but not over three years.”

Less justifiable is the acceptable deviation for billionaire owners, who will be allowed to absorb aggregate losses of €45 million over three years from 2012, so long as they are willing to cover the club’s losses by making equity contributions. To be fair, the maximum permitted loss then falls to €30 million from 2015 and will be further reduced from 2018 (to an unspecified amount). This means that in the transition (weaning-off) period, owners can pump in an average per season of €15 million up to 2014 and then €10 million up to 2017. After that, who knows? Perhaps break-even will actually mean what it says by then.

Maybe the soft landing is why the top clubs have given UEFA’s initiative their support. The European Club Association (ECA), which represents the 137 leading clubs in Europe, voted unanimously to approve the proposal at their General Assembly with their chairman, former German international Karl-Heinz Rummenigge, declaring, “these measures will shape the future of European club football into a more responsible business and ultimately a more sustainable one.” According to Platini, “The owners are asking for rules, because they can’t implement them themselves. Many of them have had it with shoveling money into clubs. They asked me to do something – Roman Abramovich asked me, the owner of Manchester City agreed – and I think it’s very moral. And it’s not just the biggest clubs – it’s all the clubs.”

"Pointing the way"

The owners might also have been stunned into action when Portsmouth went into administration. If a club from the world’s richest league could crash in this way, what about the rest? Inter’s Chief Executive, Ernesto Paolillo, admitted, “The old times are finished. Sometimes you need a shock and this is it.” At the same Soccerex Forum, Sevilla’s vice-president, Jose Maria Cruz, said that half a dozen Spanish clubs faced bankruptcy. Whether clubs are a going concern is clearly in UEFA’s thoughts and the regulations specifically require a club to “prove that it has no payables overdue towards other football clubs arising from transfer activities and towards employees and social/tax authorities.” This is evidently a major issue with the Footballing Landscape report listing €1,650 million of transfer debts, including €550 million over 12 months old. To put this more bluntly, clubs are fielding players that they have not paid for.

Although UEFA will come down hard on clubs that owe money to those in the “football family” (other clubs or players) and the unforgiving tax man, they appear more sanguine about debt in general. Platini and Infantino have both said that debts will be permitted if clubs can service the payments, so the issue is not so much the level of debt as whether the interest payments can be covered. UEFA have effectively acknowledged that debt can be an important tool for funding growth, but they want it to be manageable. However, they have expressly commented on the debt at Manchester United and Liverpool, “Just over half of the Premier League’s commercial debt has been placed into the clubs as a result of leveraged buy-outs, acting principally as a burden rather than to support investment.”

Some have argued that this UEFA initiative is one reason why the owners at Chelsea and Manchester City have wiped out their clubs’ debt by converting loans into equity, but I’m not sure that it makes much difference. Given that the loans were effectively interest-free, in terms of the break-even calculation, this is simply moving money from the left pocket to the right.

"Stuck in the middle with you"

However, it does affect one of the financial ratios used by UEFA as “warning signs”. A red flag will be raised if net debt exceeds annual turnover and the club will be asked to provide additional information, including proof that the debt level is sustainable. UEFA helpfully define net debt as “the borrowings of the club less cash” with borrowings including loans from banks and the owner. Journalists, please note that it does not include accounts payable or trade creditors.

Although they have resisted calls for a salary cap, another warning sign occurs if the wages to turnover ratio is over 70 per cent. In a slightly contradictory statement, Infantino explained the thinking on salaries, “The limit would be the break-even rule. You could spend 80 per cent on salaries, if the rest of your costs are 20 per cent. But if your other costs are higher, then the salaries will have to go down.”

Monitoring of the clubs and their adherence to the rules will be overseen by the newly-formed Club Financial Control Panel, which will be made up of financial and legal experts, who will conduct audits to ensure that the system is applied correctly. Chairing the panel will be former Belgian Prime Minister, Jean-Luc Dehaene, which is an example of how seriously UEFA is taking financial fair play. Michel Platini described Dehaene as being “very experienced in financial matters and a great football fan. He is the ideal person to take charge of the economic destiny of European football.” We shall see. If this Panel believes that the requirements have not been fulfilled, it can refer the case to the scary sounding Organs for Administration of Justice with the ultimate sanction being a ban from UEFA competitions.

"Jean-Luc Dahaene - a formidable figure"

Obviously, the introduction of such a scheme will not be without difficulties. Platini himself admitted, “It is not easy, because we have different financial systems in England, France and Germany. In England you can have debts; in France you’re not allowed to have debts; and in Germany you get relegated to the second division (if you have debts).” As always, the devil is in the detail and we can already anticipate many tedious arguments from lawyers and accountants. Nevertheless, the break-even analysis is based on accounts that have been audited and we must hope that common sense is applied during any disputes.

The other major concern is that far from making football fairer, all this initiative will achieve is to make permanent the domination of the existing big clubs: survival of the fattest, rather than the fittest, if you will. The argument goes that those clubs that have already reached the promised land of the Champions League will continue to benefit from the highly lucrative broadcasting revenues, while the challengers will no longer be able to spend big in a bid to catch up. This may be why Abramovich’s support may be considered a tad hypocritical, as he has already spent his millions to join this exclusive club.

"Back off, Europe!"

This is one of the reasons why the Premier League has reservations. Chief Executive Richard Scudamore said that he was opposed to any limits being set on the ability of owners such as Sheikh Mansour to invest money in their clubs. A spokesman went further, “The benefactor model of investment is not one the Premier League wants to see outlawed. We don’t want to discourage investment in our league, which has benefited clubs of all sizes.” There is something to this, but, for me, the financial fair play regulations are the lesser of two evils. They might make it more difficult to gatecrash the party, but they will stop clubs like Portsmouth (and Leeds in the past) gambling their future to “live the dream”. As Platini argued, being financially supported by a single backer is not sustainable, as he might run out of money (or might never had any). Of course, an Arsenal fan might also point out that their club has managed to qualify for the Champions League for many years without spending any money.

The Premier League contends that it has introduced its own financial criteria, which give them increased powers of scrutiny and intervention and will go a long way to preventing another “Portsmouth”. Clubs will have to submit annual accounts and budgetary information. Scudamore explained, “If the board believes the club is at risk of not being able to meet its obligations, then it has to step in and agree a budget for the running of that club. It has the ability to embargo any transfers or, and I think this is a first, to stop clubs renegotiating upwards any player contracts and remuneration.” Not sure about you, but his words don’t exactly inspire me with confidence.

"Ivan Gazidis - fair comment"

Will all these regulators have the bite to go with their bark? Expelling teams from European competitions works fine on paper, but would it ever happen in reality, especially when you consider that Europe’s most indebted teams are among those that attract the largest television audiences. Would UEFA really bite the hand that feeds? Indeed, one of the members of the Club Financial Control Panel admitted that there was a risk that aggrieved clubs “could fly off into the ether and form their own competition.”

Let’s end on a positive note and leave the last word to Arsenal’s Chief Executive, Ivan Gazidis, “The fundamental issue that we all face is do we have the courage and fortitude to control our spending in a fairly irrational environment. If we can manage that, there's no reason why anyone can't have a long-term stable business in football.” Can’t say fairer than that.

Friday, May 21, 2010

How Can Barcelona Afford Cesc Fabregas?

For the past few days there has been intense speculation about whether the Arsenal captain Cesc Fabregas will make his long-anticipated return to Barcelona, the team who brought him through their famed academy system. Trying to discern fact from fiction is extremely difficult, but the question that concerns me is exactly how Barcelona can afford to buy him, especially now that one of the Catalan club’s own presidential candidates has described the club’s level of debt as “stratospheric”.

Barcelona has already spent £34m this week to secure prolific striker David Villa from Valencia, while they splashed out around €90m last summer on bringing new players to the Camp Nou, including the mercurial forward Zlatan Ibrahimovic, the unpronounceable defender Dmytro Chygrynskiy and two Brazilians: the veteran full-back Maxwell and the promising striker Keirrison. Estimates of a transfer fee for Fabregas have ranged from a ridiculously low £30m to an optimistic £80m, but whatever the price, I think it’s worth looking at whether Barcelona are “mes que un club” from the financial viewpoint.

"Future team mates at Barca?"

So, do they have enough money to buy Fabregas? To be honest, it’s almost an impossible question to answer, given the willingness of Spanish banks to hand over loans to Barcelona (and Real Madrid) to fund their acquisition plans, but if we analyse Barcelona’s financials we might just be able to see whether they generate sufficient cash themselves. It might also be interesting to compare their accounts with Arsenal’s to get a sense of perspective, but before we get stuck in, I should give a few health warnings:

(a) We will look at the last set of annual accounts, not the more recent interims, as they do not contain the wealth of detail of the full-year figures. These cover the 2008/09 season, though Arsenal’s accounts are for the twelve months until 31 May 2009, while Barcelona closed their books a month later on 30 June 2009.

(b) Unsurprisingly, Barcelona’s financial statements are as per the Spanish National Chart of Accounts, which is very similar to the British format, but not exactly the same, so I have slightly amended their presentation to enable like-for-like comparisons.

(c) I have excluded Arsenal’s property development business, as this is a temporary activity for Arsenal, which should come to a (happy) end in the near future.

(d) However, I have included Barcelona’s non-football sporting activities (basketball, handball and hockey), as this is normal business for the club. In any case, it is not significant to their revenue (only £1.3m in total), though the costs are more of a drain, reducing last year’s profit by £24.3m.

(e) Currency movements can play a big part in the comparison with the Pound around 25% lower against the Euro than two years ago, even after the recent collapse of the Eurozone currency. This means that Barcelona’s revenue in Sterling terms is now much higher than it was. For convenience, I have used the same exchange rate as Deloittes in their 2010 Money League, namely €1.1741.

The first point to note is that both clubs make money, which is a rarity in the world of football. Barcelona’s profit before tax was a highly respectable £7.5m (€8.8m), but Arsenal’s was even more impressive at £39.9m, even after excluding £5.6m from property development. This difference may be down to a divergence in strategy, as Barcelona’s approach appears to be to remain profitable, but only just, as they spend available money on strengthening their squad. However, when Barcelona vice-president Joan Boix describes the club’s economic model as “solid and sustainable, independent of any sporting success”, it sounds uncannily similar to the Arsenal ethos. Having said that, you would expect their figures to be good after an incredibly successful season, during which the Catalans won the Champions League and the domestic double of La Liga and Copa del Rey. In comparison, Arsenal did not win any trophies, but their report card was not too shabby either: reaching the Champions League semi-finals, finishing fourth in the Premier League and reaching the semi-finals and quarter-finals of the FA Cup and Carling Cup respectively.

However, there is an enormous difference in revenue with Barcelona generating an incredible £311.7m (€365.9m), which is £86.6m (or nearly 40%) more than Arsenal’s £225.1m. To put that into context, Arsenal’s turnover is the second highest in England and the fifth highest in Europe. I should mention that Barcelona report their turnover as €384.8m, as they include profit on player sales, but this is shown separately in British accounts, which is the approach I have taken. Deloittes used the same assumption in compiling their Money League.

Even though the Camp Nou has a far larger capacity (98,800) than the Emirates (60,400), Arsenal’s match day revenue of £100.1m is actually £18.7m higher than Barcelona’s £81.3m. This is due to a couple of factors. First, Arsenal fill their stadium (or at least sell all the tickets), while Barcelona’s average attendance is 76,000, which is only 77% of capacity. More importantly, Arsenal’s ticket prices are among the highest in Europe, including 9,000 premium seats that generate approximately 35% of match day revenue, though any continued lack of success in terms of winning trophies might adversely affect demand at this level.

"Grounds for optimism"

Of course, the Emirates is a brand new stadium with state-of-the-art facilities, while the Camp Nou is a venerable old ground in need of a facelift. Barcelona had planned a €250m redevelopment, adding 10,000 seats and improving corporate facilities, which would have increased revenue, but this has been postponed after complaints from local residents.

In contrast to Arsenal, Barcelona do collect good revenue from pre-season tours and lucrative friendlies. For example, their tour to America plus a friendly match in Kuwait produced over £6m. They also receive money from over 170,000 members, though this is not a significant factor, only delivering £15.1m.

However, in broadcasting revenue there really is no comparison. Although Arsenal’s TV revenue of £73.2m is nothing to be sniffed at, Barcelona’s £134.9m is virtually double the size, thanks to the unique ability of Spanish clubs to negotiate individual deals in contrast to the Premier League’s collective bargaining system. This means that Barcelona earn around €120m in television rights from their deal with Mediapro, which runs until season 2012/13, but the other, smaller teams earn considerably less. For example, Valencia and Sevilla only earn €30m and €20m respectively. Apart from the obvious financial benefits, this has another advantage to Barcelona (and Real Madrid), as it makes it almost impossible for the other teams in Spain to compete with them, allowing the big two to prioritise the Champions League. Even though Arsenal, like other Premier League clubs, will receive an additional £7.5m a year from next season following the recent overseas rights deal, they are still greatly disadvantaged relative to the Spanish giants.

With Italy returning to collective rights next season, Spain is the only leading European championship in which clubs sign their TV rights individually. Not surprisingly, the other clubs in La Liga have denounced this process as “completely unbalancing the league’s sporting potential”, but time will tell whether their pressure for change bears fruit. Equally predictably, Barcelona would resist any change, being “radically and absolutely against the collective sale of TV rights.” President Joan Laporta explained the club’s position, “I don’t want to damage the interests of Barcelona Football Club, because we have to compete against teams in other countries.”

"Business is business"

Joan Boix has said that Barcelona “only budget for the team to reach the quarter-finals of the Champions League”, so their revenue got a boost when they won it in 2009, though their share of the revenue distributed by UEFA (€31m) was not much higher than the €26.8m received by Arsenal. Although they were given €7m more for winning the competition, Arsenal’s share of the TV pool was €3.1m higher, as the English TV market is larger.

Similar to TV revenue, Barcelona’s commercial revenue of £95.4m is very nearly twice Arsenal’s £48.1m. We know that this is an area of weakness for Arsenal with their revenue lagging way behind the club’s English peers (Manchester United £70m, Liverpool £68m and Chelsea £53m), but we also understand why, as the club tied themselves into long-term deals with Emirates (stadium naming rights until 2021, shirt sponsorship until 2014) in order to provide security for the stadium financing.

"Absolutely Fabregas"

Although Barcelona are famous for not having a shirt sponsorship deal, instead having an innovative partnership with UNICEF whereby they fund some of the charity’s projects, Laporta’s regime is determinedly commercial with the club’s website listing 26 sponsors, providers and partners, including Nike who pay a guaranteed minimum of €30m a year (“the best deal in our history”, according to Laporta). Unlike English clubs, when Barcelona sign a player, they also retain a significant portion of his image rights, which allow them to make millions in advertising deals. The club also receive an incredible £18.7m a year from its museum.

Arsenal chief executive Ivan Gazidis is well aware of the opportunities here and has recently restructured and strengthened his commercial team to explore new partners and overseas markets. Recent deals by other clubs highlight the size of the prize, which are conservatively worth another £20m a year. Indeed, Barcelona are a good example here, having increased commercial revenue under Laporta’s leadership from a paltry €39m in 2002/03 to €112m today.

In fact, it’s worth looking at how revenues have grown at the two clubs since Joan Laporta’s election as Barcelona president in June 2003. At that time, Arsenal and Barcelona had almost identical revenues with the North London club’s turnover of £103.8m only just lower than Barcelona’s £105.1m. Since then, Arsenal have managed to more than double their revenue to £225.1m, which is an impressive performance, but pales into insignificance compared to Barcelona, who have all but tripled their revenue to £311.6m. One of Laporta’s first acts was to replace practically the entire management team with top-class professionals, many of them recruited from outside the football industry, which shows what can be achieved with the right people. Nevertheless, Joan Boix admitted that “the growth in income in the past six years has exceeded all expectations.”

Since the annual accounts, revenue has grown still further at Barcelona with the club reporting a substantial 19.7% (€36.8m) increase from €186m to €222.8m for the six months up to 31 December 2009, though this gain was more than wiped out by a 27.1% (€45m) rise in costs from €166m to €211m, due to an increase in salaries following the signings of Ibrahimovic et al plus higher bonuses for winning the Club World Cup and the European and Spanish Super Cups. Despite “the success on the filed having a short-term economic cost”, the club still believes that “the figures highlight that Barcelona is consolidating year after year a self-financing and sustainable business model.”

"The joy of Cesc"

Arsenal’s interims told a similar story, though revenue from the football segment only grew by £1.8m (less than 2%) with property development being responsible for almost all of the club’s £40m reported increase in turnover. Again, this was more than off-set by the £10.1m cost growth to £101.4m, largely due to the £8.6m rise in player wages, despite the departure of Emmanuel Adebayor and Kolo Toure, who were on pretty high salaries, which reflected the re-signing of 17 first-team players on improved long-term contracts.

Although Barcelona’s revenue is significantly higher than Arsenal’s, so is their cost base. Their annual expenses of £307.7m are a full £113.4m more than Arsenal’s £194.3m. As always, the wage bill takes up the largest slice of the pie at both clubs: £104m at Arsenal and a jaw-dropping £171.5m (over €200m) at Barcelona. This still gives a respectable wages to turnover ratio of 55%, although not as low as Arsenal’s 46%, which admittedly is exceptionally good for a football club. Much of Barcelona’s huge staff costs is due to high variable costs of nearly £50m for bonuses payable for winning the treble, which was £28m more than the previous season when they did not win anything (third, in La Liga, semi-finalists in the Champions League and Copa del Rey).

Even so, Barcelona has eight players in the list of the top 50 footballers’ salaries with Ibrahimovic £10.4m and Lionel Messi £9.1m being the best paid. Next in the list is Thierry Henry, so if he departs for the MLS, as expected, some £6.5m will be cut from the payroll. Arsenal only has one player on this list, Andrei Arshavin in 47th position with £4.1m, though Fabregas’ reported increase to £110,000 a week would result in an annual salary of £5.7m, taking him into the top 20.

"Pep talk"

Clubs in La Liga have been helped by the so-called “Beckham law”, which allows foreigners in the top tax bracket to only pay 23% tax for their first five years in the country. In comparison, players in England now pay 50%. This means that clubs in Spain can either pay lower gross salaries to produce the same net salary as in England or pay the same salaries, leaving the players with a higher net package. It has been reported that this law is under review, but I don’t think that it has been revoked yet.

The other meaningful operating expense is player amortisation, which reflects how much money has been spent on buying new players. The accounting treatment here is to write-off the costs associated with buying players over the length of their contracts, based on the (prudent) assumption that a player has no value after his contract expires, since he can then leave on a “free”. Barcelona’s amortisation of £46.4m is considerably higher than Arsenal’s £23.9m, but this is more due to Arsenal’s very low transfer spend than any profligacy on Barcelona’s part. As a comparison, Barcelona’s amortisation is quite similar to the other “Big Four” English clubs: Chelsea £49m, Liverpool £45.9m and Manchester United £37.6m. However, given last summer’s spending spree, I would expect it to be a fair bit higher next year.

It would be a bit harsh to overly criticise Barcelona’s big money transfers, as the majority of their first team have emerged from the club’s youth system, including great players like Xavi, Andres Iniesta, Victor Valdes, Gerard Pique and Carlos Puyol. Indeed, many have described Arsenal’s own “youth project” as an attempt to emulate the Catalan system. Barcelona’s strategy is in marked contrast to Real Madrid with Laporta memorably boasting, “We create Ballon d’Or winners, while others have to buy them. One is the model of a youth system and the other one, that of Madrid, is of a wallet.”

"Project Youth at its best"

Barcelona are not afraid to splash the cash, but they also recoup some of that outlay via player sales, which earned them £15.1m in 2009 (after £20.4m the year before). Of course, Arsene Wenger is also renowned for his ability to generate revenue from the transfers of players that he has developed. In particular, last year’s accounts include a profit of £23m from the sale of player registrations and that did not include the £42m received last summer for Adebayor and Toure from the City slickers.

This is all very well, but what about all this debt that Barcelona is supposed to have? Strange – the accounts show that Barcelona’s net interest payable of £11.6m is actually lower than Arsenal’s £14.4m. Both of these are considerably lower than the annual interest payments at clubs with a genuine debt mountain like Liverpool’s £40m and Manchester United’s eye-watering £68m. We know that the solid progress on property sales has enabled Arsenal to reduce net debt by circa £160m in the last twelve months to around £175m with the property developments now being essentially debt-free, but what about Barcelona?

The precise figure for their debt is actually quite confusing with the amounts reported ranging from €30m to €489m (see table above), but the explanation is quite straightforward. The only genuine bank debt that Barcelona has is a €29m loan from La Caixa that was taken out in February 2009 (repayable February 2010) and that is the debt the club mentioned at the AGM. At the same time a club spokesman referred to net debt of €202m, which is also the figure quoted in the annual accounts, which represents the bank loan plus provisions and accruals. The Guardian quoted a net debt of €350m, which appears to be calculated from the total current liabilities of €360m, i.e. including €247m of trade creditors, less the cash at bank of €10m. Finally, one of the Barcelona presidential candidates, Sandro Rosell, argued yesterday that the debt was €489m, which is simply the sum of all the club’s liabilities (current and non-current). As Mark Twain almost said, “the reports of my debt have been greatly exaggerated.”

So which figure is correct? In their own way, all of them. The definition of debt is “amounts owed to people or organisations for funds borrowed”, but this can be broadly interpreted. At the narrowest extreme, we have just the bank debt; at the broadest extreme, we can take total liabilities (“all financial obligations, debts, claims and potential losses”). It all depends on your purpose. The club clearly wishes to under-play their debt level, while a presidential candidate would obviously want to use the highest possible figure – which is exactly what they have done. Barcelona’s view is, “We have kept the level of debt stable and we hope to carry on lowering it”. Even after the costly purchases last July, they claimed that “the ultimate proof that Barca has a solid economic base is that we didn’t have to make any new debts when signing new players this summer.” As we have seen earlier, they are not unwilling to sell players, which would reduce any debt, though I’m not sure that they would want to make money on Messi (for example).

"Sandro Rosell - he would say that, wouldn't he?"

But do the provisions include anything that might be a sting in the tail? Yes, they do – a couple of nasty surprises, in fact. First, the club has provided €36m for a payment to the Spanish tax authorities following irregularities in the late 1990s, having already paid out €25m over the same issue for earlier years. Second, they have provided €16m against a claim made by TV company Sogecable. Trade creditors are normally just the cost of doing business, so personally I would not include them within debt, but even these include some “funnies”. For example, Barcelona owe nearly €50m to other football clubs on transfer purchases, ironically including €16m to Arsenal (€12m for Thierry Henry and €4m for Alex Hleb). These “disputes” don’t quite tie in with the club’s “holier than thou” image.

There are many things to admire about Barcelona. Not just the way the team plays the beautiful game, but also the way that the club is structured, so that the executive is accountable to the club’s members with the president being elected every four years. Alfons Godall, another presidential candidate, said, “I believe ours is the best model, an example to England. We are free. We do not depend on a Mr. Abramovich. We want to be successful, but also to have meaning, social values.” It all sounds a little too good to be true and indeed there are some who consider Barcelona to be the football equivalent of Coldplay: a bit self-righteous, adored by the masses and just a little too free with their opinions. Their image would be rather more convincing if they didn’t spend so much time unsettling other clubs’ players, or if there weren’t so many empty seats at the Camp Nou.

"On your bike"

In fact, Spanish domestic football is far from healthy. Only this week, the Guardian revealed that La Liga’s debt of £3 bln was even higher than the Premier League’s £2.9 bln. The individual TV rights may be wonderful for Barcelona and Real Madrid, but every other club in Spain suffers, highlighted by Real Mallorca announcing that they would file for voluntary administration, even though they narrowly missed out on qualifying for the Champions League. In a thinly veiled message to Fabregas, Arsene Wenger said, “I can't see anyone who has a competitive edge going to Spain. They have two good teams, but the third team is 21 points behind and this week the players threatened to go on strike because they are not paid. It's a league that is in complete disarray. If you are competitive you stay in England, that's where the competition is and that's where the best players want to be.”

We don’t know what is happening behind the scenes with Arsenal’s captain, but if Fabregas does not end up at Barcelona, I don’t think it will be for financial reasons. The Catalans generate a huge amount of revenue, which they clearly budget to spend on improving their squad. Thanks to their productive youth scheme, they only need to make a few “marquee” signings every season, so they can afford to allocate a lot of money to one or two individual transfers. I don’t think that their debt levels would prevent them from making a bid, as the majority is derived from normal operations (trade creditors, provisions and accruals) and their bank debt is tiny. In any case, we have seen that Spanish banks are more than willing to lend to Barcelona and Real Madrid. Whether Barcelona would be willing to spend as much as £80m is another question, as every buyer has his limit, beyond which he will not go. Let’s hope that this is a case of an irresistible force meeting an immovable object.

Monday, May 17, 2010

Are Liverpool A Good Investment?

So Liverpool FC is up for sale – not just the minority stake that the club’s reviled owners, Tom Hicks and George Gillett, had placed on the market many months ago, but the whole damn thing. Liverpool’s bankers have finally run out of patience with the unpopular duo and brought in a new chairman, Martin Broughton from British Airways, with the explicit task of securing a buyer and getting a deal done. The banks may have extended the repayment date on the club’s loans, but they have made it crystal clear that they want their money back.

Displaying the customary self-assurance of Liverpool’s senior executives, Broughton confidently talked about “completing a sale within a relatively short period – a matter of months.” However, the fans have learned not to believe every statement uttered by the management hierarchy, most notably being disappointed by Rafa Benitez’s failure to deliver the fourth place in the Premier League that he had foolishly guaranteed. Specifically on the investment issue, managing director Christian Purslow’s promises to obtain £100m additional financing first by the turn of the year, then Easter, also proved to be of the empty variety.

Consequently, if we want to know whether Liverpool would be a good investment, we need to stop listening to those who have a vested interest in making the sale. Instead, let’s take a look at the accounts for a truly unbiased view of the club’s financial situation. Fortunately for us, last week the club published a new set of accounts for its parent company, Kop Football (Holdings) Limited. Ideally, these would be more up-to-date, as these results only cover the twelve months up to 31 July 2009. In fact, that’s the first thing to note about these results: they’re issued late (almost a fully year after the accounting period finished), which is rarely a good sign. In fact, it’s normally an indicator of bad news.

Sure enough, the headline figure is a thumping great loss before tax of £54.9m, which is 34% worse than last year’s significant loss of £40.9m. That’s a cumulative loss of £95.8m for the last two years’ results, which would give any prospective buyer pause for thought, especially as this year’s deterioration came after a successful season in which Liverpool’s revenue was enhanced by finishing second in the Premier League and reaching the quarter-finals of the Champions League, and was also boosted by a lucrative pre-season tour of the Far East. It does not take a genius to realise that the 2010 turnover will be adversely impacted by this season’s poor results (seventh in the Premier League, not making it out of their group in the Champions League), while the 2011 revenue will be even lower, as Liverpool have not even qualified for next season’s Champions League.

You don’t have to look too far for the main reason for the record loss: almost all of it is down to the huge interest payments on the loans that the Americans took out to buy the club, which has gone up 10% from £36.5m to £40.1m. Before the current ownership regime arrived, Liverpool never paid more than £3m interest in a year, as they had no need of substantial bank loans, but they have now had to shell out a total of £85.3m in interest since the takeover in February 2007. That is money that could have been used to strengthen the squad or go towards building a new stadium, instead of effectively going to the owners. It’s even more galling, when you see that this year’s increase in interest payable is due to further finance from Kop Football (Cayman) Limited, which happens to be owned by Hicks and Gillett. Financial analysts look at the interest coverage ratio, which shows how many times interest payable is covered by trading profit. Anything below 1.5x is regarded with suspicion, but Liverpool’s trading profit of £27.4m does not cover the £40.1m interest at all.

"Glad you find it funny"

Everyone knows that the club was saddled with a mountain of debt to fund the takeover, but the really bad news is that it is increasing. Net debt shot up £51.6m in the last twelve months from £299.8m to £351.8m. That is net of £26.9m of cash, so the gross debt is even higher at £378.6m, comprising £234m of bank loans (mainly with the Royal Bank of Scotland) and £144m owed to Cayman Limited. Interest on the bank loans is at LIBOR plus 5%, while the inter-company interest is accrued at a less reasonable 10% a year. This has not yet been paid, potentially casting the owners in a good light, until you realise that it is simply added to the growing debt. Earlier this year, managing director Christian Purslow said that the debt was down to £237m, but after looking at these accounts my guess is that he was referring only to the bank loans and not including the money owed to Hicks and Gillett via their offshore company. Some newspapers reported that the total debts were £472.5m, but this is over-stated, as it includes trade creditors, accruals and deferred income.

The Cayman Limited loan is repayable on demand, though the agreement states that this cannot be progressed if it would cause the company to become insolvent, which is “kind” of the owners. Of more concern is that less than half of the £297m credit facility with RBS (£110m) is secured by letters of credit and personal guarantees from the owners, leaving the remaining £187m to be secured by the club’s assets. Supporters might argue that Liverpool’s gross debt of £378.6m is only about half of Manchester United’s debt, but United generate nearly £100m more revenue and their debt is long-term, while Liverpool’s bank loans are extremely short-term in nature. The other English club with significant debt was Arsenal, but that was used to finance the construction of a cash generating new stadium, rapidly eating into the amount owed. Chelsea, of course, are in a different ball game, as their owner has simply converted the debt into equity.

"I'll get £100m by Christmas, no Easter, errm ..."

As the auditors so clearly expressed it, the club is “dependent upon short-term facility extensions”, or relying on the bank’s goodwill, which is a very uncomfortable position to be in. The current credit facility was due for repayment on 24 January 2010, but the club failed to make the £250m payment, so the bank extended the date (by just six weeks) to 3 March. Christian Purslow had previously implied that the repayment to RBS was only due in July, but it looks like the bank was not even willing to wait that long. However, it is believed that they have granted yet another extension, this time for six months, which would mean repayment in September. No wonder Broughton wants to complete the sale in just a few months.

Hicks and Gillett extending the credit facility is a habit that started last year, when RBS forced the owners to pay off £60m of their debt to the bank in return for a one year extension. In hindsight, the criticism of Dr. Rogan Taylor, director of the Football Industry Group at Liverpool University, was right on the money: “It is little more than an expensive fix – just sticking plaster, making things more difficult for the club to progress in the long run. It is still very short term, year to year, if that.” Although the directors claim that “active negotiations are in progress to secure new financing”, they acknowledge their difficulties in the annual report, “The current economic conditions have continued to have a significant impact upon world credit markets and accordingly raising finance in this environment remains challenging.” You can say that again.

Despite these financial constraints, the wage bill has still increased by 14% (£12.4m) from £90.4m to £102.9m, thus joining Chelsea, Manchester United and Arsenal as the only clubs in the Premier League with a payroll over £100m. All the same, the wages to turnover ratio is unchanged at 56%, thanks to the rise in turnover. This is not great, but is still pretty good, though it would look much worse if the club lost the revenue from the Champions League. Oh.

"What the hell's going on?"

Even though the wage bill has grown, the value of the players has actually fallen, at least on the balance sheet, with intangible assets decreasing by £34.7m to £194.8m. Of course, the players’ value in the transfer market would certainly be higher than their net book value, but the financial reality is that the club do not have many assets. In fact, according to the balance sheet, they have less than zero, as net liabilities have increased by more than £50m to £128.5m. This is despite fixed assets increasing by £20.8m, largely as a result of investment in the planning and design of the new stadium.

That means that the club has now managed to spend £45.5m on the proposed new stadium, which is some achievement, given that it is as far away as ever from being started, let alone finished. There’s still no sign of George Gillett’s famous shovel being in the ground. If the auditors decide that this stadium is unlikely to be built, these expenses will no longer be considered an asset, but will have to be written-off. The only other “asset” the club has are accumulated tax losses of £63m, which are available to offset against future profits.

Given these figures, it should be no great surprise that KPMG, the club’s auditors, repeated their warning of a year ago of a “material uncertainty which may cast significant doubt on their ability to continue as a going concern.” The fact that last year’s accounts contained the same admonition without the club going out of existence in the intervening twelve months would suggest that this is not necessarily a doomsday scenario, but it’s still a serious issue. A similar warning was included in Hull City’s last accounts, whereupon chairman Adam Pearson proclaimed, “the supporters should rest assured the club is in no danger of going out of business or going into administration”, but his tune changed a few months later, when he admitted, “nothing could be ruled out.” Hull’s problems were magnified by the significant fall in revenue following relegation from the Premier League. Potential investors in Liverpool might just ask themselves whether non-qualification for the Champions League would have a similar detrimental impact.

The really important issue for Liverpool is whether they have enough cash to pay their bills, not just in terms of their ability to service their debts, but also to pay their players’ wages and (most importantly) their tax bills. As we have seen on numerous occasions this season, HMRC have no hesitation taking football clubs to court to recover any monies owed. Liverpool are not quite there yet, but the cash flow statement does emphasise the basic flaws in their business model. At an operating level, the club generates healthy amounts of cash (£38m in 2009), but it then needs to use all of that and more on paying interest (£29m) and capital expenditure (£51m). This leaves it with a net cash outflow of £42m, which would be even worse if the club had paid the £8m interest owed to Cayman Limited. This shortfall needs to be shored up by additional financing of £49m, which obviously leads to the debt growing even more. It’s a vicious circle.

Anybody thinking of making an investment in a company would also consider the quality of the management, though they should be mindful of one of Warren Buffett’s sagacious quotes, “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.” Nevertheless, it’s worth taking a look at how Liverpool’s management are doing.

One of the key elements in the club’s stated strategy is to strengthen the football squad. Even though manager Rafa Benitez has frequently complained about not being given sufficient resources to compete, his much-loved facts do not appear to support this view. Since his arrival in the summer of 2004, the club has backed him to the tune of spending £249m on bringing players to the club. To be fair, Benitez has recovered £141m from player sales, but that still leaves a net spend of £109m, second only to the big spenders at Manchester City (£228m) and Chelsea (£145m). However, it is considerably more than Manchester United (£32m) and Arsenal, who actually have a transfer surplus of £26m over the same period. Given that all this transfer activity has only resulted in a mediocre seventh place in the Premier League, I would argue that this strategic objective has not been achieved.

The significant spend on new players is reflected in very high amortisation of £45.9m. The accounting treatment here is to write-off the costs associated with buying players over the length of their contracts, based on the (conservative) assumption that a player has no value after his contract expires, since he can then leave on a “free”. To place this into context, this is higher than amortisation costs at Arsenal £23.9m and Manchester United £37.6m, while it is only a little lower than Chelsea £49m.

"Give me more money - or I'm off"

The other component of players’ costs are wages, which is normally a very strong indicator of how well a team is likely to perform on the pitch. For example, this season the first three places in the Premier League were filled by the teams that respectively had the highest wage bill (Chelsea), second highest (Manchester United) and third highest (Arsenal). The only team to buck that trend was Liverpool, who finished seventh, despite having the fourth highest wage bill. To sum up, Benitez has been given an awful lot of money to spend on both transfers and wages, but the statistics indicate that he has under-performed.

But Liverpool are in a Catch-22 situation with Benitez, as the feeling is that the club would prefer him to leave, but that would endanger any stability the club might have. At a time when the manager should be planning for the forthcoming season, there is substantial uncertainty over his position. Some argue that this is due to the size of any potential severance payment, but the latest accounts show that the club is willing to do that if push comes to shove, paying out £4.3m to the former chief executive and academy coaching staff. This reputedly included £3m to Rick Parry, even though he was labeled a “disaster” by Hicks.

And yet, there is some good news in the accounts if you look beyond the headline figures. Most impressively, the club is profitable at an operating level (excluding player trading, interest, tax and amortisation), making £27.4m, which was actually £2.4m (10%) up on last year. This would have been even higher without the £4.3m exceptional severance payment.

"Can you hear the drums, Fernando?"

Benitez has also delivered a £3.4m profit on player sales (Arbeloa, Leto) following a £14.3m profit in 2008 (Crouch, Sissoko, Carson, Riise, Guthrie). A further £13.4m profit was made on sales after the accounting year-end closed (Alonso, Dossena, Voronin). Of course, this is a bit of a double-edged sword, as such good business will keep the banks happy, but no fan likes to see the team’s best players leave. For example, most would agree that Xabi Alonso has not been adequately replaced.

From a financial perspective, you could argue that the £14m increased loss before tax has been largely caused by the £11m reduction in profits from, player sales. In fact, if Alonso had been sold to Real Madrid just a week earlier, the loss would have been smaller than the previous year.

The other encouraging aspect in the accounts was the 14% (£23m) increase in turnover from £161.8m to £184.8m. There was good growth in all categories with broadcasting income rising £6.4m to £74.6m, reflecting the successful season. The £3.3m increase in match day income was particularly impressive, given that there were three fewer home games in 2008/09, but the star of the show was commercial revenue, which soared 25% (£13.5m) to £67.7m, thanks to four new partnerships. Only a curmudgeon would note that this revenue growth was all but wiped out by the £21m cost growth.

Enough about the past, is there anything Liverpool can do to make themselves more attractive financially? Well, they could try to build on last year’s growth and further increase revenue. The new commercial team have obviously not been sitting on their hands, as they have already secured some future growth, notably the new shirt sponsorship deal with Standard Chartered bank that commenced after these accounts. This is worth up to £20m a year, which would be a £12.5m uplift on the old deal with Carlsberg, though apparently a significant element depends on the team’s performance. Liverpool’s commercial revenue of £67.7m is already worthy of praise, only just behind the marketing machine that is Manchester United (£70m) and a long way ahead of Chelsea (£52.8m) and Arsenal (£48.1m), but the prospectus issued last year to investors targeted growth to £111m in the next five years, which would be mighty impressive.

"The money went that way"

Of course, it is TV revenue that has driven the growth in football clubs’ revenue and this is where the failure to qualify for the Champions League will hurt Liverpool. For the 2010 accounts, the Premier League has just published its revenue distribution, which included £48.0m for Liverpool, against £50.3m the previous year. The merit payment was lower, due to the seventh position, and the team was not shown live so many times.

We can also calculate the Champions League participation and performance fees for 2010, which come to €9.1m, as they will receive €3.8m for Champions League participation, €3.3m for group stage participation (six matches at €550,000) and €2.0m for group performance (two wins at €800k, one draw at €400k). According to the Guardian, Liverpool will also be allocated €17.6m from the TV pool, up from €10.1m the previous year. This means that Liverpool will get €26.7m from the Champions League, which is actually €3.5m more than the year before, despite not progressing as far – thanks to the increase in TV money. At current exchange rates, that is worth £23.2m and we can add another £1.9m to that for the Europa League, bringing in a total of £25.1m from Europe, compared to £20.2m last year.

Liverpool’s total TV money in 20009 was £74.6m, so if we subtract the £50.3m from the Premier League and the £20.2m from the Champions League, we can estimate £4.1m came from the FA Cup and Carling Cup. Assuming a similar amount for 2010, we can add the £48.0m from the Premier League and the £25.1m from the Champions League to give a total of £77.2m TV revenue. In other words, 3.5% higher than last year, even though the team’s performance was much worse.

Not bad, but the real problem comes in 2011 when the failure to qualify for the Champions League will begin to bite. That’s at least £25m revenue gone immediately. There might be some compensation from the Europe League, but even if you win that competition, you only get €6m, so that does not really help. As Professor Tom Cannon of Liverpool University said, “qualification for the Champions League remains the crucial factor in enabling the club to maintain income at current levels.” On the other hand, the additional £7.5m that all Premier League teams will receive for the new overseas rights deal will soften the blow to some extent.

However, the real key to unlocking Liverpool’s revenue possibilities is a new stadium. Anfield is a wonderfully atmospheric old ground, but its capacity is only 45,000, which is much less than Old Trafford (76,000) and The Emirates (60,000). According to Deloittes, Liverpool’s match day revenue of £42.5m is less than half of Manchester United (£108.8m) and Arsenal (£100.1m), while even Chelsea, whose Stamford Bridge ground is even smaller (42,000), earn more from this category (£74.5m). Liverpool only earn around £1.6m from each home match, which is significantly less than United (£3.6m) and Arsenal (£3.1m). Yes, it would cost a lot to construct a new stadium (though this could be offset by offering naming rights), but Arsenal have demonstrated that this can be a profitable move, especially if you can sell a few thousand corporate boxes. New chairman Martin Broughton agreed, “I think taking the stadium plan forward has to be in everyone’s interests. I think when you look at the financial logic, it has to happen. It’s inescapable that any new owner would not go ahead with the new project.”

The other way to improve your financials is to cut costs, which in the case of a football club effectively means reducing the wage bill, as it’s by far the largest expense. The easiest, though most unpopular, route would be to cash in on the top stars, like Steven Gerrard and Fernando Torres, which would have the added benefit of generating big money in transfer fees. The Daily Mail reported that Chelsea were preparing a £70m bid for Torres alone. The chairman has assured the fans that the club does not need to sell, “We won’t sacrifice our prize assets to reduce debts”, but the players may take the decision out of his hands, as they want Champions league football and must be unhappy with the club’s financial situation. That would be another vicious circle, as losing these players would then make it even more difficult to qualify for the Champions League.

"Enough about the debt"

This is why the only realistic way out of the financial mess is to sell the club. Over the past year the press has mentioned many possible buyers, including Saudi princes, Kuwaiti billionaires, Indian industrialists, anonymous Americans, Chinese gaming tycoons and our old friends DIC, but Christian Purslow’s deadlines for attracting investment have come and gone without success. To be fair, he was dealt a poor hand, having to convince investors to stump up for a minority stake. He was also hamstrung by Hicks and Gillett, who have consistently over-valued the club, e.g. recent reports mentioned an absurd valuation of £800m. However, one positive side-effect of not qualifying for the Champions League should be a reduction in the price. Furthermore, the Financial Times reported that Broughton has been given “a casting vote on all board issues, including the planned sale.”

Liverpool will have to be careful not to jump from the frying pan into the fire by finding a new owner that would also burden the club with debt. Broughton is aware of this, “It has to be the right owners and also the right financial structure – no more than a reasonable amount of debt that you would expect in any organisation of this size.” It is clear that a new owner would require very deep pockets, but how much would he need? That obviously depends on how much Hicks and Gillett want. The Americans borrowed £300m initially in 2007 (£185m to buy the shares including fees plus £113m working capital), but as we have seen the net debt has risen to about £350m, so a price of £400m would provide them with a tidy £50m profit, which is not too shabby.

"Martin Broughton - he'll take more care of you"

In addition, finance expert David Bick said that a new owner would “need to have access to very large sums of money to build the new stadium, revitalise the management and allow for strengthening of the playing squad.” A new stadium would cost at least £300m (maybe more); the transfer budget required to improve the current under-performing team could be as much as £100m (Torres said that Liverpool were “four or five class players” short of a successful side); while changing the management might cost £15m. If any of this is funded by loans, the owner would also require sufficient working capital to service the debt. When you add all this up, we are not far short of a billion, so millionaires need not apply.

Surely Liverpool are too big to fail? That’s what they said about Lehman Brothers before it went bust. There’s no doubt that the accounts make for awful reading, which was confirmed when the Premier League asked Broughton to provide assurances that the club would be able to fulfill its fixtures next season. RBS also offered assurances that they would continue to support the club until a sale is finalised, but this was only after: (a) Hicks and Gillett reduced the bank loan by paying in more of their own money; (b) Barclays Capital were hired to find a buyer. Now that the bank loans have been trimmed, the bank is unlikely to let the club go broke, especially as it is up for sale. It is also unlikely that a bank would take the unpopular step of cutting off Liverpool’s support, though it is not so long ago that Barclays made a stand over Southampton’s overdraft, ultimately pushing them into administration.

"Kop that"

However, at the risk of stating the obvious, Liverpool are not Southampton. We are talking about one of football’s great institutions with an incredible history: winning the Champions League and European Cup five times, the English League championship eighteen times and the FA Cup seven times. In marketing terms, it is still one of the leading global football brands, playing in the richest domestic club competition in the world. It surely cannot be time to say “good-bye”, but are Liverpool a good buy? Many people would not want to invest their hard-earned money, but if a wealthy benefactor had a spare billion, he just might.

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