Liverpool - A Show Of Strength

It was so close. Although Liverpool supporters would naturally have been disappointed that Brendan Rodgers' team narrowly missed out on securing title winning glory in the 2013/14 season, objectively speaking their surge to second place in the Premier League represented great progress. Not only did they improve significantly from the previous season’s seventh, but they also qualified for the Champions League, a competition that has played an important part in the Reds’ famous history.

It was a similarly positive story off the pitch, as Liverpool reported their first profit in seven years after revenue surged by 24% to a record £256 million, despite receiving no benefit from European football. These figures were testament to the financial progress the club has made since it was purchased in October 2010 by Fenway Sports Group (FSG), the American investment company run by John W. Henry. The good news did not end there, as it came hot on the heels of UEFA clearing the club of any breaches of their Financial Fair Play (FFP) regulations.

This represented a significant turnaround in the club’s finances, as the massive losses of recent seasons were converted to a £0.9 million profit before tax (£0.4 million after tax). As chief executive Ian Ayre said, “The profit of just under a million pounds from a loss last time of almost £50 million is a huge swing for us.” He rightly pointed out that the key component of this £51 million improvement was “media revenue increase” of £37 million, driven by the new Premier League television deal, as 2013/14 was the first season of a three-year cycle.

In addition to the increase in TV money, the other revenue streams also grew steadily with commercial and match day income each up around £6 million. The loss from player sales was also slashed by £12 million to just under a million, while the player amortisation and impairment charges fell by £6 million, as last season’s figures included the impact of correcting previous errors in the transfer market. These improvements were partially offset by £17 million higher expenses, largely due to a £13 million increase in the wage bill.

It is worth noting that the net interest payable of £4.6 million has come down significantly since the bad old days of the Tom Hicks and George Gillett regime, when it peaked at £17.6 million in 2010. That said, it is one of the higher interest payable figures in the Premier League, albeit nowhere near as much as Manchester United £27 million and Arsenal £13 million.

The last time that Liverpool reported a profit was back in 2007/08 with £10 million. Since then, the club has registered substantial losses, amounting to £176 million over the five years leading up to 2013/14, including an average of £47 million for the last three seasons. In fairness, many of these losses have been due to FSG having to spend substantial sums on player recruitment in order to repair the damage caused by the previous owners’ lack of investment in the squad.

The other factor that has had a strong influence on Liverpool’s losses is the amount booked for so-called exceptional items, which adds up to nearly £100 million over the last eight years, mainly due to writing-off £61 million spent on unsuccessful stadium developments and £31 million paid-out as a result of changes in coaching staff (e.g. the departures of Roy Hodgson and Kenny Dalglish). In fact, Liverpool would have made a profit of £10 million in 2011 without such exceptionals. These have been steadily reducing and were down to just £1.4 million in 2013/14 for costs related to the new stadium development in Stanley Park.

Profits and losses have also been influenced by player trading. In the six seasons up to 2011 Liverpool made a total of £106 million profit on player sales, including £43 million in 2011 and £23 million in 2010 with profitable sales including Fernando Torres to Chelsea and Javier Mascherano to Barcelona. However, in the last three seasons the club has registered total losses of £15 million from this activity, including the sale of Andy Carroll to West Ham.

Basically, player sales have gone from boosting profits (or at least reducing losses) to being a drag on the financials. This will, of course, change in the 2014/15 figures, as this season will include the lucrative sale of Luis Suarez to Barcelona, reported in various media outlets as being between £65 million and £75 million.

The potential importance of this activity can be seen by looking at Chelsea, who would have made a £46 million loss last season instead of a £19 million profit without their £65 million profit from player sales. Also, it will not have escaped the attention of Liverpool’s board that Everton made £28 million profit from player sales.

So what, you might say, given that Liverpool still produced a profit. That’s true, but their £0.9 million profit is still at the lower end of the spectrum. To date 14 of the 20 clubs in the Premier League have published their 2013/14 accounts and 11 of those have reported profits – with Liverpool’s figure being the lowest. Five clubs have announced profits before tax of more than £10 million: Manchester United £41 million, Everton £28 million, Chelsea £19 million, WBA £13 million and West Ham £10 million.

In fact, the only clubs to have so far announced a loss are Manchester City £23 million, Cardiff City £13 million and Aston Villa £4 million, and all three of those clubs have their own particular issues.

Revenue grew by an impressive £50 million (24%) from £206 million to £256 million in 2013/14, largely driven by media revenue, which was up £37 million (58%) from £64 million to £101 million. There was also good growth from match day of £6 million (14%) from £45 million to £51 million and commercial income of £6 million (6%) from £98 million to £104 million.

Ayre noted, “Revenue has been consistently increasing from around £170 million in 2009 to over £250 million today”, which is largely true, though the growth is actually £78 million (44%) from £177 million in 2009. It’s also worth noting that the majority of this growth (£67 million) has come in the last two seasons, as revenue was relatively flat over the previous seasons, partly due to the disappearance of Champions League revenue, which offset commercial growth (including bringing catering revenue back in-house in 2010/11.

The absence of Champions League money has restricted the growth in broadcasting revenue since 2009 to “only” 35% (£26 million), largely due to the new Premier League TV deals, though also partly because of the inclusion of Liverpoolfc.TV Limited in the club’s figures. Commercial income has, in fact, been the main growth driver, increasing by 72% (£44 million) over the same period, while match day income has risen by a more modest 20% (£8 million).

So Liverpool remain in 5th place in the English revenue league with £256 million, as all other clubs have grown their revenue in 2013/14, thanks primarily to the new Premier League TV deal. As Warren Buffett once said, “A rising tide lifts all boats.” Liverpool are still a fair way behind their rivals for Champions League qualification with Manchester United’s revenue of £433 million being an amazing £177 million (or almost 70%) higher. Similarly, Liverpool are below Manchester City £347 million, Chelsea £320 million and Arsenal £299 million. That said, Liverpool are in turn much higher than Tottenham’s £181 million.

Liverpool’s challenge can be seen more clearly by comparing the 2013/14 revenue growth for the top six English clubs. Although their growth of £50 million is seriously impressive, it’s still lower than the growth reported by Manchester City £76 million, Manchester United £70 million, Chelsea £60 million and Arsenal £55 million. In other words, the gap was large and will get larger – unless Liverpool do something about it. This is why they are developing Anfield and are so focused on qualifying for the Champions League (which they did last season, but need to do consistently to narrow the financial gap).

The increase in Premier League TV money has resulted in English clubs moving up the Deloitte Money League with Liverpool rising three places from 12th to 9th place, ahead of Juventus, Borussia Dortmund and AC Milan, despite not competing in European competitions. The magnitude of Liverpool’s task in their Champions League group this season is emphasised by the disparity with Real Madrid, whose revenue of £460 million is around £200 million more than Liverpool’s £256 million.

Despite the new Premier League TV deal, commercial income remains the most important revenue stream at Liverpool, contributing 41% of total revenue, though it is now only just ahead of broadcasting 39%. With the addition of Champions League revenue in 2014/15, broadcasting is likely to become the highest revenue stream. Match day income is down to 20%, which should be addressed with the planned stadium expansion.

Broadcasting revenue increased by £37 million (58%) to £101 million, very largely driven by the new Premier League TV deal, though this was partly offset by no Europa League revenue in 2013/14. In fact, even though they finished 2nd in the Premier League, Liverpool actually received the largest central distribution with £97.5 million, up £43 million (or 78%), as they were shown live more often than champions Manchester City, which resulted in higher facility fees (25% of the domestic deal).

The only other variable element in the Premier League distribution is the merit payment (also 25% of the domestic deal), which depends on where you finish in the league. All other elements are equally distributed among the 20 Premier League clubs: the remaining 50% of the domestic deal, 100% of the overseas deals and central commercial revenue.

Of course, this is just the first year of the current Premier League TV deal and there will be even more money available when the next three-year cycle starts in 2016/17 with the recently signed extraordinary UK deals with Sky and BT producing a further 70% uplift. My estimates are that a club finishing near the top of the table will receive around £150 million a season, which would represent an additional £50 million. If anybody had any doubts as to why so many overseas owners have been investing in English football, it’s staring you in the face right here.

Liverpool’s broadcasting revenue for 2014/15 will be boosted by their participation in the Champions League (and Europa League). Given the equitable nature of the Premier League TV deal, the real differentiator for the leading English clubs is in fact the Champions League. In 2013/14 Liverpool earned most from the Premier League, but their total broadcasting income of £101 million was surpassed by Chelsea £140 million, Manchester United £136 million, Manchester City £133 million and Arsenal £123 million.

In that season, the English clubs earned an average of €38 million, ranging from Manchester United’s €45 million to Arsenal’s €27 million. In the past Liverpool have earned similar sums from Europe’s premier competition, averaging around €29 million between 2007 and 2010.

The importance of qualifying for the Champions League has been further emphasised with the new deal from the 2015/16 season that will further increase the prize money. UEFA recently advised the European Club Association that clubs could expect a 30% increase in revenue, but the uplift is likely to be even higher for English clubs, as BT’s exclusive acquisition of UK rights is double the current arrangement.

Although Liverpool’s failure to qualify from their Champions League group will reduce the amount of money they receive, this blow will be partly mitigated by some revenue from dropping down into the Europa League (like 2009/10), but also the way that the TV (market) pool is allocated. A club’s share of the UK market pool is dependent on both how far they progress (compared to other English clubs) and their finishing place in the previous season’s Premier League. In this way, Liverpool will benefit from finishing 2nd in last season’s Premier League, which will give them 30% of half of the market pool.

Commercial revenue rose £6 million (6%) from £98 million to £104 million, mainly due to additional sponsorship and merchandising sales. New sponsor deals were announced with Subway, Dunkin’ Donuts, Vauxhall and Garuda, which is an example of Liverpool’s strategy of “leveraging the club’s global following to deliver revenue growth.”

Only seven clubs generated more commercial income than Liverpool, which is an excellent performance, given the lack of Champions League qualification in recent seasons and demonstrates the strength of Liverpool’s “brand”. That said, other leading clubs do earn prodigious amounts of money from commercial activity. In particular, Bayern Munich have managed to increase commercial income from £203 million to £233 million, more than double Liverpool. PSG’s numbers are inflated by their €200 million deal with the Qatar Tourist Authority.

To reinforce this point, in England Manchester United have increased commercial income by 171% (£119 million) to £189 million in the last five years, which is far superior to Liverpool’s 72% (£44 million) over the same period – and that’s before United receive the full benefit of their massive new Chevrolet and Adidas deals. In fact, the gap between Liverpool and United has grown from £10 million in 2009 to £85 million in 2014. Similarly, Manchester City is now up to £166 million, driven by their Etihad sponsorship. Liverpool are still way above Arsenal, though the Gunners’ PUMA deal only starts from the 2014/15 season.

Liverpool’s shirt sponsorship of £20 million, signed in July 2010, is one of the highest in England, though has been overtaken by Manchester United’s £47 million Chevrolet deal and Arsenal’s £30 million Emirates deal. Recently, Chelsea announced a new deal with Yokohama Rubber for a reported £38-40 million. Therefore, Liverpool will be looking for a significant improvement when their current deal expires at the end of the 2015/16 season with figures of at least £30 million being discussed.

Last month Liverpool announced a “record” New Balance kit deal, switching from Warrior to their current supplier’s parent company. No figures were divulged, but I suspect that the basic deal is worth the same amount as the six-year deal signed with Warrior in 2012, namely £25 million a season, with the increase coming from the other part of the deal, i.e. earnings from merchandising sales, due to New Balance’s better distribution network. Whatever the exact details, it will have to go some to match Manchester United’s “largest kit manufacture sponsorship deal in sport” with Adidas, which is worth £750 million over 10 years or an average of £75 million a year from the 2015/16 season.

Match day income grew by £6 million (14%) from £45 million to £51 million, mainly due to additional pre-season matches, ticketing and hospitality revenue, though this was partially offset by not having any European matches. The pre-season tour attracted huge crowds including 95,000 in Melbourne and 82,000 in Jakarta. Great stuff, but Liverpool’s match day income is still miles behind Manchester United and Arsenal, who both generate over £100 million – or more than twice as much.

In order to address this difference, FSG plan to expand Anfield in much the same way they successfully redeveloped the Fenway Park Stadium for one of their other clubs, US baseball team the Boston Red Sox. The plan is to expand the Main Stand capacity by 8,300 seats taking the overall Anfield capacity to around 54,000, which should be complete for the 2016/17 season. Potentially, there would also be a further increase of 4,800 seats in the Anfield Road stand at a later date.

It is estimated that this would increase revenue by £25 million: £20 million from the extra seats and (an ambitious) £5 million for naming rights for the stand (though importantly the club would keep the famous Anfield name for the stadium as a whole). The additional seat income is largely driven by 4,500 corporate seats, which Ayre says is vital for the plan’s viability: “Corporate hospitality revenues are essential. This means we will pay the debt back quickly… while increasing revenues into the playing squad.”

"Sterling service"

Including the cost of acquiring the land, this project will cost well over £100 million, but it is likely to be funded by an interest-free loan from the owners, thus eliminating the need to make steep interest payments, as Arsenal are still doing for their Emirates Stadium.

This all sounds very promising, as relatively low match day income has long been Liverpool’s Achilles’ heel, but every silver lining has a cloud and there has been much concern among supporters’ groups about ticket prices. Season tickets have risen by around 10% over the last few years, which is more than other leading clubs. Liverpool chairman Tom Werner is clearly aware of the fans’ discontent: “We are committed to working towards a tiered solution at Anfield, so there are affordable tickets as well as tickets that are higher priced.” We shall see. Certainly the new TV deal should give clubs the opportunity to address ticket prices.

Wages increased by £13 million (10%) from £131 million to £144 million, largely due to higher bonus payments “as a result of the impact of the 2nd place Premier League finish.” Interestingly, Ian Ayre has spoken of making player contracts more performance-related, which seems very sensible. Despite this wages growth, the wages to turnover ratio was cut from 63% to a very respectable 56%, the lowest for five years.

The highest paid director, presumably Ayre, earned £1.032 million, which is almost exactly the same amount as he was paid the previous season.

Note: these wage figures have been adjusted from the staff costs in the club’s accounts to exclude once-off exceptional items (for pay-offs to departing coaching staff), as most clubs show these separately.

Liverpool’s £144 million is the 5th highest wage bill in England, exactly in line with revenue, behind Manchester United £215 million, Manchester City £205 million, Chelsea £193 million and Arsenal £166 million. United’s wage bill is almost 50% (£71 million) more than Liverpool.

The different investment policies of the last two sets of owners can be clearly seen by looking at the net transfer spend: in the three years leading up to 2010/11 the club had net sales proceeds of £8 million, but there has been net spend of £135 million in the four years since then, even after a number of big money sales including Torres and Suarez. It was imperative that Fenway splashed the cash after Hicks and Gillett kept their hands in their pockets and they have done so. This season alone, they have bought Lallana, Markovic, Lovren, Balotelli, Moreno, Can, Origi and Lambert with the proceeds of the Suarez sale.

That said, Liverpool have still been outspent by other clubs in that four-year period, especially by Manchester United £260 million, but also Manchester City £212 million and Chelsea £196 million. They have however spent more than Arsenal, even though the Gunners bought Mesut Ozil and Alexis Sanchez, and Tottenham, whose figures are impacted by the sale of Gareth Bale to Real Madrid.

Net debt has increased by £12 million from £114 million to £126 million. As there are only modest cash balances of less than £500,000, gross debt is £127 million, made up of interest-free loans of £69 million from the owners (unchanged from last year) and bank loans of £58 million (up £10 million). Note that the reported net debt excludes £20 million owed to the subsidiary Liverpoolfc.TV Limited.

Although debt has been steadily increasing since 2011, it is still nowhere near the shocking levels reported under the previous hated regime. While there was “only” £123 million net debt in the football club, the full picture was revealed in the holding company where borrowings had grown to nearly £400 million. Fortunately, this debt was largely eliminated following the change in ownership.

In addition to this debt, Liverpool have contingent liabilities of £12.8 million, which represent fees that may be payable depending on contractual clauses such as number of appearances, Champions League qualification, etc. Similarly, Liverpool will potentially receive £3.3 million from other clubs. Debt will surely increase for the stadium development, though this should be provided by the owners.

Since FSG bought the club, they have actually had lower cash flow available from operating activities: £81 million in four years, compared to £123 million in the previous four years. Despite this, they have spent more on players (£152 million vs. £110 million), though less on capital expenditure (£16 million vs. £52 million). This has been funded by higher bank loans, making use of a revolving credit facility.

There has actually been relatively little funding from FSG, though they did of course write-off the previous debt and injected £47 million into the club in 2012, which was used to fully repay the outstanding stadium loan. All these external loans have meant relatively high interest payments: net £29 million over the last eight years.

Liverpool have managed to avoid any FFP issues, even though their cumulative pre-tax loss of £89 million for the last three seasons is clearly higher than UEFA’s €45 million limit (assuming the owners cover the deficit by making equity contributions). This is because UEFA permits some “good” costs to be excluded from its break-even calculation, such as stadium development, youth and community development and goodwill amortisation.

However, the clause that has probably most helped Liverpool is the possibility to exclude the wages for players signed before June 2010 (when the FFP rules were introduced). Theoretically, this would only be allowed if Liverpool’s losses had reduced from 2011/12 to 2012/13, which was not the case, but as the 2011/12 accounts only covered 10 months, the argument must have been that it would have been higher on an annualised basis.

Despite the potential problems for Liverpool, John W. Henry has actually been one of FFP’s staunchest advocates: “Financial Fair Play is a much bigger solution to the problems Liverpool and other clubs are trying to compete against.”

"Little Red Corvette"

Going forward, Liverpool should not experience any more FFP issues, as their revenue will continue to grow. The 2014/15  accounts will be further improved by Champions League money plus the Suarez transfer (and the accounts state that the net effect of player sales will be a £52 million profit), while the figures in 2016/17 will be enhanced by the Anfield expansion and the blockbuster new Premier League TV deal, especially as Premier League rules prevent much of this money being used on player wages.

If Liverpool can also improve their record in the transfer market by successfully investing in young players, that will not only help the squad, but potentially lead to the club once again making money on player sales.

Returning to profit after so many years is only one step in the club’s journey, but, as those sons of Liverpool, Echo and the Bunnymen, once said, “A show of strength is all you want.” Although there is still much to do, it is difficult to argue with Ian Ayre, who said, “With a hugely supportive ownership we have brought financial stability back to this football club and we now have the right structure, platform and ambition to continue growing on and off the pitch.”