Monday, May 23, 2011

Liverpool's Future Strategy

If ever a football club’s season could be described as the proverbial “game of two halves” that would be the one experienced by Liverpool fans this year. Following Roy Hodgson’s appointment as manager last July as the replacement for the popular Rafael Benitez, the Reds endured their worst league start in more than 50 years, falling into the relegation zone in October after a dismal home defeat to newly promoted Blackpool.

Hodgson’s grim tenure came to an end in January, when he was replaced by Kenny Dalglish, who inspired a revival that took Liverpool back up the table to sixth place. Moreover, the team threw off the shackles and played some sparkling football, including wins over Manchester United, Chelsea and Manchester City. Although Dalglish’s record in his previous reign on the Mersey was highly impressive, winning three league titles and two FA Cups, some had expressed doubts about the Scot’s credentials, as he had not managed a club for more than a decade and he was initially appointed on a temporary basis.

However, the mood at Anfield has clearly taken a massive turn for the better and virtually all of the non-believers have now been converted. Thus, it was no surprise that Dalglish was duly confirmed as permanent manager a couple of weeks ago, when he was given a three-year contract along with his first team coach Steve Clarke. As new owner John W Henry said, “Kenny is a legendary figure, both as a supremely gifted footballer and successful manager.”

"John W Henry - the man with a plan"

The new ownership is, of course, the other vital change to occur at Liverpool during this momentous season with New England Sports Ventures (NESV) taking over from the reviled pair of Tom Hicks and George Gillett last October. Well known for its stewardship of the Boston Red Sox, one of the most famous baseball teams, and involvement in NASCAR, the company has now changed its name to the Fenway Sports Group (FSG), but the key executives remain the same. As far as Liverpool are concerned that means John W Henry, the principal owner, and Tom Werner, the chairman, who both hold 50% of the voting rights in the football club.

They look like a good fit for Liverpool, as explained by the club’s former chairman Martin Broughton, “New England have a lot of experience in developing, investing in and taking Boston Red Sox - as the closest parallel - from being a club with a wonderful history, a wonderful tradition that had lost the winning way, and bringing it back to being a winner.” In fact, after buying the Red Sox in 2002, NESV delivered success just two years later, as they won the World Series in 2004, ending an 86-year wait for honours, and then repeating the feat in 2007.

On the face of it, they could not be more different to their unpopular predecessors, Hicks and Gillett, who saddled Liverpool with a mountain of debt when they bought the club in March 2007. Ever since then, the Reds had been on a financial knife edge. Even though the eternally optimistic former managing director Christian Purslow claimed that he could not “conceive of a situation where Liverpool Football Club could go into administration”, the reality was that the choice had been taken out of his hands.

"Luis Suarez - happy days"

The club’s bank loans were due for repayment in January 2010, but the club failed to make the £250 million payment, and the club only survived when the bank extended the date first to March and then by a further seven months to October to facilitate the sale of the club. Liverpool’s auditors KPMG had gone public with their concern over the level of debt the previous year, when they described the issue as “a material uncertainty which may cast significant doubt on the group’s and parent company’s ability to continue as a going concern.”

UEFA were also well aware of Liverpool’s financial difficulties. Last month William Gaillard, Senior Advisor to UEFA President Michel Platini, spoke about them, while warning football dignitaries of the dangers of leveraged buy-outs, “The club has been rescued, thank God, but it was a close call. They suddenly found themselves being owned by two failed banks that had been taken over by governments.”

In fact, the Royal Bank of Scotland (or indeed Wachovia) could have put the club into administration (with a nine point penalty) at any time in the last few months of the Hicks and Gillett regime. Importantly, this meant that RBS could dictate terms, allowing them to place Purslow and commercial director Ian Ayre on a reconstituted board, while stipulating that the owners could no longer appoint new representatives to the board. This meant that when the decision to sell the club was taken, Hicks and Gillett no longer had a majority, so could be outvoted by the other board members.

"Keep calm and Carra on"

Even though he is from Texas, Tom Hicks did not know when to “fold them” and tried to block the sale, describing the transaction as “an epic swindle at the hands of rogue corporate directors.” So RBS brought a legal action before the High Court to obtain a judgment on the ability of the new board to complete the sale to NESV, which they duly won. Even the elegant Broughton could not resist putting the boot in, describing the former owners’ actions as “a flagrant abuse of their undertakings.”

Acting on behalf of the club, Barclays Capital had contacted 130 potential investors, but only two bids had been received before the deadline with NESV’s winning out. They paid a total of £300 million for the club: £218 million for the equity, effectively the amount that Hicks and Gillett owed to RBS, and £83 million to assume responsibility for other debts. This was a pretty good outcome for the club, as the acquisition debt was wiped out, leaving NESV with more funds to spend on the football side of the club – and it had the added bonus of serving up a side order of schadenfreude, as Hicks and Gillett lost their £144 million investment.

The last accounts published under the old administration reflected the club’s financial shortcomings, as they reported a £20 million loss, which was £6 million worse than the previous year, even though profit on player sales rose dramatically from £4 million to £23 million, mainly due to the sale of Xabi Alonso to Real Madrid. The wage bill climbed an incredible 18% to £113 million, which was much higher than the 4% revenue growth.

That said, for the last two years, Liverpool have only made a small loss before interest payments, £2.3 million in 2010 and £3.5 million in 2009, but the impact of interest on the loans that Hicks and Gillett took out to buy the club has been hugely detrimental with net interest payable increasing from £13 million last year to £18 million in 2010.

However, that’s not the whole story, as these are only the accounts for The Liverpool Football Club and Athletic Grounds Limited, while the majority of the club’s debt was held in the holding company. Unfortunately, the 2010 accounts for Kop Football (Holdings) Limited, the largest group company incorporated in the UK, have not yet been published, but we do know that the net interest payable at that level in 2009 was a whopping £40 million, leading to a net loss for the group of £55 million. If we make the reasonable assumption that the level of interest in 2010 is the same, this would mean that the club had paid around £125 million of interest during Hicks and Gillett’s unhappy reign.

Another interesting point is the large amounts paid out for changes in management, which amounts to £12 million in the last two years, including around £8 million for Rafael Benitez and his coaching staff in 2010 and £3 million compensation for directors’ loss of office in 2009 (reportedly Rick Parry).

In fact, Liverpool have only made a profit once in the last five years, specifically 2008, when they registered an £8 million surplus, largely due to £22 million profit on player sales, after a number of experienced players were moved on (Crouch, Sissoko, Carson, Riise and Guthrie). However, the new Premier League deal was also an important contributory factor, leading to a £16 million rise in television revenue.

Like all football clubs, the additional riches provided by the ever-increasing TV deals has been a critical factor in Liverpool’s revenue growth, contributing almost half (£29 million) of the £64 million rise in turnover since 2005. However, the fastest growing activity is commercial income, which has risen an impressive 68% in the same period. Match day revenue has also grown from £33 million to £43 million, but remained relatively flat compared to the other revenue streams. On the plus side, Liverpool’s revenue is fairly evenly distributed among the three main revenue streams, which means that they are not unduly reliant on one area.

There are a couple of ways to look at Liverpool’s revenue of £185 million. On the one hand, this puts them in a more than respectable ninth place in the Deloitte’s Money League, which ranks clubs in order of revenue, but, on the other hand, they are still a long way behind the clubs at the top of the (money) tree. In particular, the Spanish giants generate considerably more income with Real Madrid and Barcelona earning £359 million and £326 million respectively, approaching twice as much as the Reds. Moreover, bitter rivals Manchester United earn £100 million more than Liverpool every season, which is a considerable competitive advantage.

Furthermore, Liverpool dropped a place in the Money League last season and can expect a further decline next year, as they will not have the benefit of Champions League revenue, while Manchester City’s commercial revenue is likely to climb again under their Middle East owners. This would mean that four English clubs will receive more money than Liverpool (United, Arsenal, Chelsea and City), which would be a concern, unless the new owners can address the club’s weaknesses.

One obvious issue is the wage bill, which has soared to £114 million, up from £96 million the previous year, mainly due to contract extensions. This has increased the important wages to turnover ratio to 62%, the first time that it has gone above 60% in that period. In fairness, this is still below UEFA’s recommended maximum limit of 70% and is much better than most other clubs in the Premier League, notably big-spending Manchester City (107%) and Chelsea (82%). What is worrying, however, is that performance on the pitch has worsened, while the wage bill has risen, which is the opposite of what usually happens in football, culminating in the team failing to qualify for the lucrative Champions League.

That was then, this is now.

The recently appointed managing director, Ian Ayre, described the results as “a footnote in our history”, as he suggested that the club was now “moving forward.” It is entirely appropriate that we concentrate on the new owners’ future strategy, not least because John W Henry made his fortune as a futures trader.

Actually, I say “fortune”, but everything’s relative. While his estimated worth of £375 million might be enormously impressive to the proverbial man in the street, it’s small change compared to the billions owned by other prominent owners of football clubs, such as Sheikh Mansour, Roman Abramovich, Stan Kroenke and even the Glazers. It’s actually even lower than the likes of Peter Coates at Stoke City and David Sullivan at West Ham.

Therefore, Liverpool fans should not expect a classic sugar daddy. Instead they have got a group of savvy businessmen with proven expertise and a superlative record in sports management. Nevertheless, the new owners will still need to access substantial funds in order to strengthen the squad and address the stadium situation (either build a new stadium or redevelop Anfield), so the obvious question is how will this be financed? Liverpool fans would not want to see the club take on large levels of debt once again, so Henry’s team really has to address the club’s faltering business model.

Although we are not privy to their strategic plan, we can make some fairly good guesses at where they will try to turn around Liverpool’s finances, based on their announcements to date, which I have attempted to summarise in a 15-point plan.

1. Put your shirt on it

While discussing the most recent financial results, Ian Ayre stated, “We have had significant commercial growth since these accounts were published.” He can point to the shirt sponsorship deal with Standard Chartered starting next season, which “can generate up to £81 million” over four years. Although it is understood that some of this may be performance related, this implies £20 million per annum, which is £12.5 million higher than the current deal with Carlsberg. This is in line with Manchester United’s Aon deal, but Barcelona’s £25 million deal with the Qatar Foundation has raised the bar again - even higher than Bayern Munich’s £24 million deal with Deutsche Telekom.

Last month it was reported that Liverpool had secured a £25 million kit deal with Warrior Sports, a subsidiary of New Balance, from the 2012/13 season, though this has not been officially confirmed. This is an example of the synergy that FSG can bring to the party, as Warrior recently announced a deal to manufacture kit for the Red Sox. The deal would more than double the amount received from Adidas, who currently pay £12 million a year. Although the press reported this as a record for English football, it is actually slightly lower than Manchester United’s Nike deal, which had a contractual step-up from £23.3 million to £25.4 million this season, but it’s still a mighty impressive increase.

In total, the two shirt deals will deliver a substantial revenue increase of around £25 million a season (Standard Chartered £12.5 million, Warrior £13 million).

2. Going global

Liverpool’s commercial income of £62 million is already pretty good, being sixth highest in the Money League, though it is only half the amount earned by Bayern Munich and Real Madrid and it actually fell last year if you consider that LiverpoolFC TV Ltd was brought in-house in July 2009. In fact, Liverpool sell more shirts than any other club except Madrid, Barcelona and United.

An important element of the club’s strategy is therefore to “leverage the club’s global following to deliver revenue growth”, which Tom Werner emphasised, “We consider Liverpool to have untapped potential globally.” This is clearly one of the key drivers for American investors, as explained by Don Gerber, head of Major League Soccer, “There’s a belief that there’s a valuable global franchise with these clubs.”

In particular, Werner has stated that the club is focused on Asia (“The support the club has there is already considerable”), hence the pre-season tour to China and South Korea. However, this has lead to club sponsor Standard Chartered, who make much of their income in Asia, somewhat crassly suggesting that they would like Liverpool to sign players from that region, citing the example of Park Ji-Sung at United.

Liverpool fans would have been equally perplexed at the news that basketball star LeBron James had bought a stake in the club, but this is part of his marketing deal with FSG and has helped raise Liverpool’s profile in the States.

More worrying is Ian Ayre’s apparent support for the 39th game, a proposal to play an extra round of Premier League matches at neutral venues outside England: “We have a duty to fans around the world to give them access to the product.” I’m not sure that the fans on the Kop would necessarily agree with that sentiment.

3. Nothing succeeds like success

While it is true that success on the pitch should lead to financial strength, this is not always the case, which is amply demonstrated by the distribution of Premier League revenue. In Liverpool’s case, their share of the revenue only fell £2.3 million in 2009/10 to £48 million, even though they dropped from second to seventh place.

This is because of how the Premier League distribution model works with half of the domestic money and all of the overseas rights being split evenly among the 20 clubs. It’s true that 50% of the domestic rights are still up for grabs, but that does not make a big difference for the leading clubs: (a) 25% is for merit payments with each place in the league worth £800,000; (b) 25% is paid in facility fees, based on how often a club is shown live on television, which will always be a lot for a club like Liverpool.

However, the key point here is that a club’s revenue will effectively go up by default, simply from its presence in the Premier League, as each new TV deal increases the size of the pot available to distribute. The three-year deal for 2004-2007 was worth £1.45 billion, while 2007-10 rose to £2.5 billion and the latest contract for 2010-13 is worth an incredible £3.4 billion. Figures have not yet been released for 2010/11, but the increase for Liverpool will be at least £7 million.

4. We are the champions

The relatively small difference between the leading clubs in terms of Premier League distributions only emphasises the importance to Liverpool of qualifying for the Champions League. Last season the Reds earned £26 million from this competition, even though they were eliminated at the group stage, supplemented by £3 million after parachuting into the Europa League and reaching the semi-finals. That figure does not include extra gate receipts or higher payments from success clauses in commercial deals.

Liverpool’s failure to qualify for Europe’s flagship tournament for the last two seasons has cost them dearly. Given that UEFA’s prize money has been increasing on the back of higher TV deals, all in all, it’s probably now worth at least £35 million a season. It is therefore imperative that Liverpool reclaim their traditional place among Europe’s elite.

5. The revolution will be televised

While TV rights as a whole have been rising, the really interesting aspect is that overseas fans that have been behind the explosive growth with the revenue doubling each time the rights are re-negotiated: 2001-04 £178 million, 2004-07 £325 million, 2007-10 £625 million and 2010-13 £1.4 billion.

As Steve McMahon, the former Liverpool player turned executive at the Singapore-based Profitable Group, said, “It is a global game. The television figures when Liverpool or Manchester United play are 600 or 700 million.” These figures dwarf the Super Bowl, hence the interest of American investors in the Premier League.

This is particularly relevant to Liverpool, as FSG have substantial expertise in this sphere, owning 80% of New England Sports Network, a regional cable television network, while Tom Werner is an experienced television producer. Although English football clubs have clearly benefited from television money, they are strictly amateurs compared to their cousins across the water. To give an idea of the size of the prize, the value of the New York Yankees’ official cable network is three times as high as the club itself.

Perhaps the most intriguing question is how Premier League clubs react to new technology. To date, digital rights have been treated as little more than an afterthought to the main TV deal, but the emergence of fast, broadband networks might just be the catalyst for clubs to interact directly with fans, when revenue could potentially explode.

6. A fair day’s work for a fair day’s pay

On completing due diligence, John W Henry said that Liverpool’s wage bill was one of “a number of unpleasant shocks”. Specifically, he thought that it was a huge payroll for a squad with little depth. It stands to reason that the £114 million wage bill should be reduced, especially when you consider that it is so much higher than Tottenham’s £67 million. That does not imply a “slash and burn” approach, more a case of the club getting better value for money, as Henry explained, “We have to be more efficient. When we spend a dollar, it has to be wisely. We cannot afford player contracts that do not make long-term sense.”

7. Steady as she goes

One obvious way to cut costs would be to stop sacking managers. Including the £7.3 million reportedly paid to Roy Hodgson (after just six months), this adds up to the best part of £20 million in the last three years. Encouragingly, Henry said, “Our goal in Liverpool is to create the kind of stability that the Red Sox enjoy. We are committed to building for the long-term.” That said, Tom Werner did say that he saw “no reason why Roy can’t be our coach this year and in the future” only two months before he was given his P45, though, in fairness, Hodgson was not FSG’s appointment. The new owners will also try to bring continuity by adopting the director of football model, which has not always been successful in England, but has worked very well at clubs like Lyon.

"Cheer up, Fernando. You just made Liverpool £50m"

8. The art of the deal

One possibility that would help reduce the wage bill is offloading players who are no longer wanted. We can anticipate Liverpool selling the likes of Jovanovic, Poulsen and Aurelio at generous prices in order to get them off the books. There are also quite a few players currently out on loan that are likely to leave, including Aquilani, Konchesky and Degen.

Such sales have a triple whammy effect, as they also reduce player amortisation, which is on the high side at Liverpool, and potentially bring in a profit on sale (if the sales price is higher than the remaining value in the accounts). Liverpool will report a very high profit on sale in this year’s accounts, mainly due to the £50 million sale of Fernando Torres to Chelsea, but also Javier Mascherano to Barcelona for £17 million and Ryan Babel to Hoffenheim for £6 million, and next year’s profit could also be on the high side if the new owners clean house.

Babel is a good example of how this works in accounting terms. Purchased from Ajax in 2007 on a five-year contract for £11.5 million, you would assume that his £6 million sale in January would have produced a loss. In total, that would be correct, but in this year’s accounts the club will actually show a £2.6 million profit, as the player’s value in the books had been written-down to £3.4 million (£11.5 million cost less 3.5 years amortisation at £2.3 million a year).

9. Can’t buy me love

Liverpool have effectively been a selling club during the Hicks and Gillett era with the net spend dramatically slowing down after their arrival. Some have speculated that the new owners will be equally cautious, referring to FSG’s belief in the application of statistical analysis made famous by Moneyball, Michael Lewis’ best seller about the innovative methods adopted by Billy Beane at the Oakland Athletics baseball club. However, there is a bit more to their transfer market strategy, as explained by Larry Lucchino, president and CEO of the Red Sox, who said that they “take some of the quantitative analysis approaches and overlay them with the resource advantages of our market.”

In other words, they have used their financial muscle to complement best value purchases by also spending big on the right players. It’s more like the Barcelona method, rather than the Arsenal strategy they have publicly praised. Henry underlined this willingness to splash the cash when necessary by pointing out that the Red Sox had been second in spending over the last decade in major league baseball.

"Andy Carroll - big fee for a big man"

A more obvious example occurred in January when Liverpool paid £35 million for Andy Carroll and £23 million for Luis Suarez. Incidentally, Henry has explained that the seemingly exorbitant Carroll fee still fits in with FSG’s principles, as they were happy to pay this, as long as they secured £15 million more when selling Torres.

With all the likely ins and outs, my guess is that Liverpool fans and director of football Damien Comolli can expect a very busy summer in the transfer market.

10. Give youth a chance

So FSG’s preferred model is one with top quality stars supplemented by home grown youngsters, as outlined by Henry, “We have been successful through spending and through securing and developing young players.” Tom Werner added, “We certainly feel we can do a better job bringing in more players that are home grown”, as he promised to invest in the scouting network.

This makes complete sense in the Financial Fair Play era, as youth development costs are excluded from UEFA’s break-even calculation. In addition, any profit on the sale of players that don’t quite make it at Liverpool is useful in balancing the books.

In fairness, the academy set up by Rafa Benitez is already prospering with many players involved in first team action this season (Jay Spearing, Martin Kelly, John Flanagan and Jack Robinson). Last month, the progress was endorsed by no fewer than seven Liverpool youngsters being named in England’s Under-19 squad, following the selection of four players in the Under-17 squad.

11. Grounds for hope

Although Anfield is a wonderfully atmospheric old ground, its capacity is only 45,400, which is much less than Old Trafford (76,000) and The Emirates (60,400). Liverpool’s match day revenue of £43 million is less than half of Manchester United (£100 million) and Arsenal (£94 million), while even Chelsea, whose Stamford Bridge ground is even smaller (41,800), generate more than them (£67 million). Liverpool only earn around £1.6 million from each home match, which is significantly less than United (£3.6 million) and Arsenal (£3.5 million).

The previous owners felt that the only way to increase match day income was to build a new stadium, but they put the plans for Stanley Park on hold, due to the economic crisis. However, FSG are also looking at the option of redeveloping Anfield. The Red Sox chief operating officer Sam Kennedy summed up the situation, “We have the expertise for building new and renovating old, and both options are definitely still on the table.”

The ownership built new stadiums in Baltimore and San Diego, but perhaps more pertinently redeveloped Fenway Park, the iconic Red Sox stadium, applying creative techniques such as more seats, concessions, advertising and corporate hospitality, which increased match day income by 50%.

Given that the accounts state that nearly £50 million of previously capitalised stadium development costs are “highly likely” to be written-off, the implication is that the preference is for redevelopment at Anfield, not least because Henry admitted that the previous stadium move proposals “just didn’t make any economic sense or they would have been built.”

Whichever route is taken, it will still cost a lot of money, e.g. the Fenway Park renovation cost north of £200 million. As the costs are so high, the possibility of ground sharing with Everton cannot be ruled out, but the counter-argument is that any future revenue would also have to be shared.

"Pepe Reina has his say"

12. You’ll never walk alone

The downside of staying at Anfield is that fans are likely to have to pay more for their tickets. To compensate for the revenue shortfall at the Red Sox, ticket prices have rocketed in Boston. Indeed, season tickets next season have already gone up 6.5%, though 2.5% of that is to cover the VAT increase, with the cheapest tickets on the Kop now costing £725, the most expensive £802. Surprisingly, the entry level tickets are more expensive than any other team in the Premier League except Arsenal, according to a survey by Sporting Intelligence. This is on top of significant price increases last season.

13. What’s in a name?

Ian Ayre has confirmed that Liverpool would actively look for a stadium naming rights partner – but only if they move to a new stadium. Not many English clubs have succeeded in securing naming rights, but it is more common in America and could provide up to £10 million a season, maybe more with FSG’s contacts.

14. Never was so much owed by so many to so few

Liverpool’s debt had reached shocking levels under the previous unwanted regime. Although there was “only” £123 million net debt in the football club, the full picture was revealed in the holding company where debt had grown to over £400 million, including £280 million owed to the banks, which had surged after the bank applied penalty fees for the loan extension, and £144 million owed to Hicks and Gillett.

The really good news is that Henry has confirmed that the change in ownership has removed all the debt except for £37 million for development work on the proposed new stadium, which is part of a £92 million credit facility agreed with RBS. Normal working capital requirements mean that £87 million of this had been used by 31 January this year.

This is enormously significant to the club’s finances, as the prohibitively expensive annual interest payments of £40 million have been drastically reduced to just £3 million, which means that Liverpool are “able to invest more in the team rather than servicing debt” according to Ian Ayre.

Of course, debt could substantially rise again for future stadium developments, but Henry does not appear overly concerned, “I think fans will understand that stadium debt is different from acquisition debt.”

"Steven Gerrard reflects on the first half of the season"

15. All’s fair in love and war

John W Henry has praised UEFA’s forthcoming Financial Fair Play rules that aim to make clubs live within their means, while curbing excessive spending, “UEFA is doing a great thing in making clubs sustainable and that’s good news for us.” In fact, UEFA’s William Gaillard claimed that the main reason why Henry (and indeed Thomas di Benedetto at Roma) had invested in European football was the new regulations, as “they make a much more predictable environment, more similar to what they are used to in American sport.”

Although the new owner is concerned that other clubs might seek to find ways around the rules, especially after Chelsea’s massive spending spree in the January transfer window, this will not be the Liverpool way: “We've always spent money we've generated rather than deficit spending and that will be the case in Liverpool. It's up to us to generate enough revenue to be successful over the long term. We will not deviate from that.”

So, FSG have plenty to offer in their play book, but some have wondered whether their proficiency in American sports will mean much in England. Turning round the Red Sox is one thing, but Liverpool football club is (quite literally) a different ball game. While Liverpool share many similarities with the Red Sox, such as a glorious history, passionate fanbase, small stadium and, er, they both play in red, there are also quite a few differences in the two sports.

"Lucas and Meireles reinvigorated by King Kenny"

In particular, Premier League football clubs do not have a salary cap, have to deal with powerful agents and need to worry about the threat of relegation. That last point may not apply to Liverpool, but at the other end of the table they are concerned with the financial consequences of missing out on the Champions League. It is also fair to say that Boston is a wealthier city than Liverpool, so FSG’s strategy of raising ticket prices may not be appropriate on the Mersey, though you have to think that the new owners are too smart to squeeze the orange too hard.

Of course, an owner’s nationality should not be an issue. As Martin Broughton said, “There’s nothing wrong with being American. Ask Sunderland, Ellis Short is a great owner there. Wherever you come from you need the right people. These are the right people.” There might be a nagging concern that they will not bring the same level of commitment to Liverpool as to their American franchise, but if that were the case, it begs the question of why they would get involved in the first place.

Fundamentally, they are businessmen, who will have been attracted by Liverpool’s “fire sale” price and enormous potential, but Henry has said that investors in sports franchises are not in it for the money, “I don’t think you go into sport to make a profit.” He has asserted that all the money NESV has made in baseball has been ploughed back into the Red Sox, be it the team or the club’s infrastructure. Ultimately, money can be made from football if and when the value of the club appreciates, but that is likely to mean a long-term investment.

"Anfield of Dreams"

Let’s not forget that Liverpool football club is 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 business terms, it remains one of the leading sports brands, with the club competing in the most watched domestic league on the planet.

Arguably, John W Henry has got himself a bargain here, though there is much to do to strengthen the club’s business model. As the club’s sponsor said, “I don’t think English Premier League clubs know how valuable they are.” If Henry can help instill the winning mentality back into Liverpool, as his group did with the Red Sox, this could be a licence to print money. Of course, the fans are more interested in whether the team does the business on the pitch. Over to you, Kenny.


  1. Wow, excellent article. Loads of work must have gone into it.

  2. Fantastic Article, much appreciated

  3. Love the article. I think things are really looking up with the club. The two keys, as with all clubs, is getting CL and solving stadium issues.

    it seems that Ian Ayre is really maximizing commercial opportunities at the club which is great.

    I think the new owners are realizing how important long-term success on the pitch is important to their value. H&G did not have a long-term plan as they were not interested in a long term investment.

    Thanks for the great article.

  4. Well thought out article.


  5. A great article. I've only skim-read it so far but will read in more detail in the next day or certainly deserves it.

  6. Great article. As a Liverpool fan I feel eternally grateful to our (new) American cousins for saving our necks from the wretched last lot.

    Liverpool Football Club has been badly run for too long. David Moores held the club back as chairman; Rick Parry was an incompetent MD. Yet Parry was replaced by Christian Purslow who was an absolute disaster once he started meddling in team affairs.

    The CL revenues and our stadium compared to the top 4 are now where we're lagging behind.

    it's shameful that we get so little on the pitch for our £113m wage bill. Wasters like Joe Cole, Jovanavic, Degen, Poulsen, Konchesky et al all need to go. Even Gerrard (120k a week) and Carragher (90k a week) are no longer worth their superstar salaries now they're at the twighlight of their careers.

    Kenny has saved our necks this season on the pitch in the same way FSG have on it, but it's a long road back to the top.

  7. anyone notice that once gerrard was no longer fit, liverpool's season became far better. Not the first time I had noticed this.

  8. “I don’t think you go into sport to make a profit.”

    Hmmm....I have to say that I am confused in this one.

    1. The Glazers will make a fortune on Man United because they are unique.

    2. But Man United is a monster and all other clubs are struggling to compete on the field. And as such are unstable.

    Surely fans will wake up in time and see that the Premier League at the top is uncompetitive, that it is dominated by Man United and that this is unlikely to change?

  9. great article the truth about so many things. cheers.

  10. unfortunatly liverpool needed to take up the big sugar daddies back in 2007...when DIC where interested but declined for Hicks and co.

    Everyone says time for rebuilding, but top qualty players won´t go to a club thats not in europe nevermind the Champions League....

    The sad fact will be Roman and city will constantly blow you out of the transfer windows...not to mention the lastest billionaires that are QPR....Feck sake even Neil Warnock has bigger spending clout than Kenny D.

    Like I said before If only you had said to the Arabs back in 2007....IF ONLY!!!!

  11. Thanks for a brilliant analysis mate.


  12. Just a quick point - The Red Sox and MLB do not have a salary cap. they have a luxury tax which is IMO completely ineffective.

  13. Thanks for a great piece and nice to get some more detail on the FSG rather just the usual references to Moneyball.

    And interesting points about the Red Sox re-development and the impact on ticket prices.

  14. To anonymous 8:52pm

    Henry was referring to annual profits (used to make income or pay off debt) like H&G did. With the Red Sox, they have not taken profits or money out of the club. FSG will make a lot of money when they sell the club as the value of the club will grow significantly.

  15. Great article..removing Joe Cole from the wage bill alone will be worth 13m over the next 3 years..shows how important the summer clear out is going to my view, it's even more important than the summer buys.

  16. I hope many liverpool fans can give this a read before telling the club that we need to Spend £40m on a single player this summer. Growth is an ongoing thing. NOt immediate

  17. Very informative article. Thanks for the information.

  18. As SF Red said above. MLB doesn't have a salary cap like the NFL. It has a 'luxery tax' which is largely ineffective in restraining spending. Which is why they spent over $250,000,000 on Carl Crawford and Adrian Gonzalez (contracts over 7 years + bonuses) this summer.

    I personally would like to see a new Anfield built to help regenerate the local area as well as drastically improve commerical revenue. It would also enable them to keep the old place fully open throughout the building process and so keep money coming in. Selling off the land would generate some cash too as there are plans for new regeneration and rail links through the area.

    I'd like to say thanks though for the great article and good information. It's nice to see confirmation that we're growing as a club again. I would like to ask your opinion on the HUGE wage bills of Chelsea and City and how they can possibly fit into the FFP rules, even with Champions League football. I know it's a popular question, but I'm curious to see if UEFA will actually achieve their ambition of curbing 'sugar daddy' investment like we've seen at those clubs.

  19. A truly staggering analysis Kieron. Many thanks.

    Some American Reds I know swear that John Henry *is* the smartest guy in the room. It sounds like you tend to agree.

    They also say that number 5 was the dealmaker for FSG, along with FFP. Not just the overseas TV rights but the digital/mobile/broadband possibilities.

    It at least gives me hope that long term we can close the gap on those at the top of the Deloitte FML.

    The point that really shocked me was 12. That Sporting Intel piece passed me by last summer. Even under Dalglish in Jan/Feb when tickets have gone on general sale for ticket office collection, large numbers have remain unsold. As a Liverpool based Red I know the local support is already disenfranchised from the match to a significant degree. The club are going to have to think extremely carefully about further general ticket price increases. They also need to be careful how any increased capacity from new/upgraded Anfield is utilised. More season tickets (the only way to guarantee matchday revenues), cheaper general tickets for core supporters or more premium seats for the prawn sandwich brigade?

    I think we can expect a decision soon after the results of the season ticket waiting list cleansing operation is announced. That's the first step to getting a firm view of future demand.

  20. Great article, thank you!

    Of course their leadership of the Red Sox was brilliant because they understood from the start that what matters in sports is revenue. They renovated the stadium, brought extra money from HD games via their network and built the economic structure to compete with the mighty Yankees. It is very fortunate for Liverpool that such a competent team has purchased the team, as they can really see the financial opportunities that a club in the EPL can have.

    On the field what they did in Red Sox was to sign the aging stars for a lot of money but for few years, so as to have the option to offload an ageing starter if their performance declined diagrammatically. For a team like Liverpool that will face problems with aging starters in the future (Caragher, Gerrard, Kuyt) this is a sound policy.

    Also they were not afraid to pay big in order to succeed. The acquisition of ace pitcher Curt Schilling at the age of 38 in a 2 year contract (the equivalent of 30 for a footballer) was what gave the Red Sox the edge to win the World Series. These types of deals are what Liverpool lacked for so many years with the transfers of the likes of Riera, Poulsen and Koscielny that showed a lack of understanding of the quality required from the players for the club to succeed.

    Furthermore what I really liked about John Henry was his commitment to the fans, giving interviews, appointing go-to persons and generally trying to understand what Liverpool meant to the Kop. He was at the stadium in most significant games and showed in his statements an understanding of the game and roster structure. Of course he is not expected to decide whether Spearing has a future in Liverpool but it is good to finally have an owner that is not expecting any money "from the draft".

    All in all John Henry and his team can really have a significant impact in European football, making Liverpool once again a giant.

  21. time and effort is there for all to see. fantastic work, analysis is bang on the money!

  22. Thanks for a great article!

  23. Wow excellent article, in depth and well thought out, my brain cells needed firing back up after being subjected to dumbed down Sky TV, over the past week

    Thank you.

  24. Excellent work again. My favorite blog writes about my favorite club - a perfect day!

  25. Great stuff as usual - the two tidbits I loved were
    1) Rafa's good work in establishing a top academy that should serve the club well.

    2) The inevitable rise of ticket prices. I'm curious - what is the normal "ticket price inflation" for the EPL? Is the Liverpool price gauge the average or above it?

  26. Thanks very good read

  27. Incredibly written article, Very well put. Well done mate.

  28. Another excellent read, as ever. If player fire sales are going to become the order of the day to meet UEFA's new financial rules, what is going to happen to transfer values and salaries in general? And will there be a general leveling up of talent outside the top clubs as second string players, who are still decent players, get unloaded to make room for home grown (cheaper) youngsters?

  29. Quality article! Thanks for that :)

  30. Excellent article, hopefully some of those outwith the fan base and within who kept banging on about Rafa may actually now realise how much of the malaise was caused by the gruesome twosome.
    £409 million pounds of debt (the majority of which was acquisition debt) resulted in us nerly going to the wall.
    It's absolutely criminal that the club was sold to Hicks and Gillet in the first place as any investigation into their background would have highlighted leveraged buy-outs as their preferred modus operandi.
    Hopefully the new owners will be better (hard not to be) and given what they've done so far plus the messages coming out of the club this seems to be the case.

  31. Brilliant read, makes me excited to be a red again after suffering such dross over the past few yeas from those cowboys. Thanks for putting the effort in!


  32. Quality article Kieron, thanks. A nice compilation of the relevant info surrounding our American owners. Although I was aware of the facts and figures, your presentation of them in one article is excellent...and leaves me feeling vaguely optimistic!

  33. Excellent article.

    The Premier League money for 2010-11 has been confirmed at £55.2M.

    Hopefully at least this season, the loss of European TV money will be offset by £37M less in annual interest payments.

  34. Anonymous 8.52? Your CLEARLY either a sad Manc' worried about what MIGHT come now that LFC have the owners United WISH they had that WON'T destroy them with debt or else a sad Chelski fan still crying into his cornflakes that we sold you Torres, effectively mugged you for 50 million AND got the better player by far to replace him in Lil' Luis Suarez.

    Just so you know? Money ISN'T the be-all and end all - It does NOT trump hard work and effort which funnily enough is how United got there in 1992/93 the first time THEY did it after 26 years. IF Fenway have the right strategy and put in the right amount of money? They WILL get the rewards - Now a sad idiot like yourself might not recognise that fact so desperate are you for our recent decline to continue but this WILL Happen nonetheless. Oh and United? Watch them GO in a couple of years and I mean straight DOWN - What happened Last October with Liverpool at the Courts etc? Will look like a picnic by comparism to WHEN the Glazers default and take United down with them in flames and they WILL. Enjoy it while you can United lovers. Glazers will take it all away soon enough.........

    One more thing for the benefit of anonymous 8.52? and his idiotic ideas re' Liverpool - You think we have NO money do you? I suggest you google Fenway and see HOW many (rather wealthy) organisations it's comprised of - John Henry is just the FACE of a FAR larger and more powerful organisation than many realise (in particular the New York Times investors within the groups - Check the list of their owners). Fenway have FAR more power and strengh behind them than many think or might see at first - far, far more- They can rival even Abramovich quite easily and rather more so now he's considerably less rich thanks to the crashes of recent years. Fenway has a LOT of steel behind the outer velvet glove it presents to the world - Not that it's obvious to the fools who doubt them until it's Far to late......

    Anyway - With THAT sort of power behind Liverpool? You'd better believe Anonymous that we WILL be back and far sooner than many think and when we are? We'll be there to stay as well............

  35. Great article .. made my day.. i would like to add one more thing. FSG is not the only shareholder in LFC, there will be many small investors like Len Bron who will be plowing there money .. it will be interesting to see how they will create the revenue stream.

  36. Terrific article. A great combination of past performance analysis and educated forecasting. Also profiles the new owners in an unbiased and accurate manner. This article reaffirms my belief that the club is heading in the right direction.

  37. Cheers for the thrid article about Liverpool, my club! As usual, the article is very interesting and like many LFC fans, there is hope things will change for the better.
    I agree that Hicks and Gillett were a mistake, although I was lucky enough to get some cash from them when they bought the club (as shareholder). But the end cost was tremendous for the Reds.
    I think the main issue remains the stadium. New ground, redeveloping Anfield, ground sharing with Everton? With a 45000 seater, we cannot compete...Lets hope this is resolved as quickly as possible...

  38. Hey Rambler, great article.. just a question if u could clarify.. I'm still unclear about this amortization business.. Let's take ronaldo's 80 million transfer for example.. Real pay 80 million upfront and amortize it over 5 years for 16 mill every year.. Now the year they bought him they pay 80 mil but report only 16 mil.. Shouldn't this create a difference of 64 mill in the accounts for the year they bought him?

  39. Thanks for all the very kind comments. It took me 3 days to write this article, but it's all worthwhile with feedback like this. I have quite a few Liverpool supporting friends, so I really wanted to do the story justice.

  40. @Anonymous (10:58),

    This is a bit tricky to understand if you're not an accountant, but let's try to explain.

    When Ronaldo was bought, the 80m transfer fee was booked as an asset in Madrid's books with their cash being reduced by the same amount. At that point, there was no impact on the profit and loss account.

    As you rightly say, after a year 16m amortisation was charged to the P&L. This reduced the value of the asset in the balance sheet from 80m to 64m, so that's where the difference is.

    Not sure if you know how double-entry accounting works, but this is exactly how it would be booked:

    Dr Asset 80
    Cr Cash 80

    Dr Amortisation 16
    Cr Asset 16

    Hope that helps clarify amortisation.

  41. @swiss

    Excellent article. A question I've been meaning to ask. When a player is sold do the club have to pay tax? It's just that I noticed during the Man United bond issue there was a tax liability of circa £17-18m which I put down mainly to the sale of Ronaldo.

  42. Superb article and a must read for any liverpool fan and indeed any sensible football fan. These guys have our best interests at heart because we have a shared interest in succeeding.

    I just hope the new UEFA financial fair play rules are adhered to by the likes of Chelsea and Man City otherwise what is the point. Uefa will need to show a willingness to impose strict penalties and tackle the issue head on.

  43. Brilliant article, think you've reached new heights with this one.
    Just one question in relation to the current credit facilities on the club. You state that “The really good news is that Henry has confirmed that the change in ownership has removed all the debt except for £37 million for development work on the proposed new stadium, which is part of a £92 million credit facility agreed with RBS. Normal working capital requirements mean that £87 million of this had been used by 31 January this year.”
    Does this mean that after takeover LFC had access to £92m in credit and was only using £37m of it after takeover, yet by the end of January they were using £87m of this facility? And if so how could they be using so much extra in the space of a few months? i.e. is it (a) further losses during that period, (b) paying for the purchase of players and sacking of “the hodge” before end of January, (c) reducing trade creditors or increasing debtors (d) something else I’m completely missing?
    I just can’t get my head around and extra £50m in the space of a few months.

  44. @Steven,

    Yes, United's bond prospectus states that £17.2 million of the tax liability was due to the sale of a player. Given the sums involved, that must surely be Ronaldo.

  45. @Anonymous (4:53),

    We cannot be certain exactly what Henry was referring to when he spoke of debt, as he might have been talking specifically about the large balances with RBS and Wachovia, without including an overdraft.

    Nevertheless, from the accounts for Liverpool Football Club and Athletic Grounds Ltd, we can see that at the last year-end (31 July 2010) the club had net debt of £123m, comprising inter-company loans £104m and bank loans £38m less cash £19m. The accounts confirm that the inter-company debt was eliminated following the acquisition, which would leave just £38m - in line with Henry's assertion.

    The accounts also state that the club took out a new £92m credit facility after the acquisition, analysed as: stadium £47m, letters of credit £25m and working capital £20m. They confirm that £86.6m of this facility had been utilised by 31 January 2011.

    I don't consider this credit facility as sinister in any way. It effectively replaces the previous £97m RBS facility that Liverpool had and is normal practice for most companies.

    Much of the facility is just for the stadium debt that has been built up over the years, while my guess is that the majority of the increase has been used for transfer fees and normal working capital requirements.

    In theory, Liverpool's activity in the January transfer window nets out, as they bought Carroll and Suarez, but also sold Torres. However, it depends on how the deals were structured, e.g. the timing of the payments for each deal. This might be further complicated by stage payments.

    What we do know is that working capital requirements vary during the year at a football club, as much of the cash inflow is "lumpy", e.g. season ticket money is received upfront, while TV money comes in a couple of slices. Meanwhile, costs are spread fairly evenly throughout the year.

    In summary, I don't think that the debt is anything to worry about.

  46. Thanks for explaining the double entry system in accounting..Appreciate the effort..

  47. Typically high-quality article here. As a Boston resident who was a Sox fan long before I ever began following European football, there's one thing that I think Liverpool fans should be more aware of.

    Ever since John Henry and NESV took over, the Red Sox farm system- in essence, the reserve/trainee and youth teams(numbering about 140 players total)- have undergone a dramatic improvement. It is extremely important to draft and sign good baseball prospects in the 18-21yo range, since a major league club like the Sox will have 5-6 years of a promoted prospect at comparatively low wages. The ability to bring up a couple high quality young players to start for cheap(usually at around $400k/year- e.g. Jed Lowrie, Daniel Bard, Clay Buchholz) allows the club to splash out for a big signing(e.g. the monster contract of 7 years/$154 mil for Adrian Gonzalez, one of the best hitters in the game) or two each season to hopefully win the championship. Another thing is that Boston has been one of the organizations most willing to take a shot on prospects from independent minor leagues and have found some decent players. Perhaps the closest analogy would be a Premier League team being able to effectively scout non-League football and pick out a player who, after a year or two in the reserves, turns into a solid squad player who can fill a specific role or at least provide depth- and do so for low wages.

    Before the takeover, Boston's farm system was almost always in the bottom third of Major League Baseball teams. Since then, we've almost always been in the top third. If John Henry and FSG stay true to form, there will probably be significant investment in the academy, and a greatly expanded scouting network in South America and Asia.

  48. Really appreciate the effort and the extent that you go to in responding to post-article requests. You are great at breaking down otherwise complicated accountant speak into easily readable paragraphs.

  49. Excellent article! Intelligent contributions from The Swiss Ramble & Zonal Marking amongst others shame many journalists/experts who make a living in the national press. Great detail, effort, expertise and warmth has been put into this.

    I've read a few articles before and I'm amazed! I'm sure other fans will wait their turn for the inspecting eyes of the Swiss Ramble to gaze upon their club but the wait is worth it!

  50. "the value of the New York Yankees’ official cable network is three times as high as the club itself."

    ...because NY Cable TV companies lost a court case and have a) carry the channel and b) to pay Yankee TV (or whatever it is called) $1 or so for every subscriber they have (even only those on the basic package)!

  51. Not sure if you heard about this but apparently Mr. Henry enjoys your blog!

    "Consistently remarkable, excellent analyses on the business of football" was what he tweeted (5 July 2011)

    Excellent article and easy enough reading even for those of us that are not totally up to date with topics like accountancy!

    Was a pleasure reading such a well constructed article on a very interesting subject.

    All the Best Swiss!


  53. What an excellent article. Thanks

  54. Yeah, was going to mention that the tweet by Henry brought me onto this blog.. I read your Palermo and RM blogs first and they were excellent! Then I did a search for my club Liverpool and was very happy to find an article on our new owners..
    Keep up the good work!

  55. Wow. Loved this article and have been slowly reading some of the others. Thanks to the author for taking the time to do such impressive research and analysis.

    Keep up the great work.


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