Liverpool - Over The Wall

It’s been a bit of a mixed bag for Liverpool supporters in recent times. Last season the Reds finished sixth in the Premier League, while they also reached the semi-finals of both domestic cup competitions, before being eliminated by Aston Villa in the FA Cup and Chelsea in the Capital One Cup.

This season looks like it might be another case of Liverpool being the nearly men, having been narrowly beaten by Manchester City in the Capital One Cup on penalties, while they currently lie just outside the European places in the Premier League. They still have hopes of success in the Europa League, having just put bitter rivals Manchester United to the sword at Anfield, but there’s still a long way to go in that competition.

Performances have been inconsistent, the best example being the spanking they administered to City just three days after the Wembley defeat, which is a sure sign of a club in transition. That is indeed the case, as Liverpool changed managers mid-season, replacing Brendan Rodgers with the charismatic Jürgen Klopp in October.

That change came almost exactly five years after Fenway Sports Group (FSG), the American investment company run by John W. Henry, purchased the club in 2010. There is no doubt that the owners have brought financial stability with the club “operating in a sustainable manner despite the cost of football continuing to rise.”

"Boy from Brazil"

Revenue has risen every year since the FSG takeover, while the enormous debt that the reviled former owners, Tom Hicks and George Gillett, had placed on the club through their leveraged buy-out has been largely eliminated. Indeed, last season FSG converted £69 million of debt into equity and invested a further £49 million into the initial stadium expansion costs.

So the club is in far better shape financially, though admittedly it would have been difficult to do worse than the previous hierarchy, whose mismanagement resulted in Liverpool’s future being decided in the High Court six years ago. That said, the club has come a long way, from the brink of administration with the unloved Roy Hodgson as manager, to a profitable operation with the popular Klopp at the helm.

However, FSG put their foot in it recently with the ticket pricing fiasco. Ultimately, they backed down in the face of a major fan backlash, so they were at least big enough to admit that they had made a mistake, but they should never have allowed the situation to get so far that it caused a mass walkout at one home match.

Chief executive Ian Ayre was keen to emphasise that the owners “commitment is unwavering”, noting that they keep pumping money in and have never taken anything out, which is a fair point, but they got it badly wrong over the ticket prices.

"Tattooed Love Boy"

Chairman Tom Werner claimed, “We have strengthened the club both on and off the pitch”, but in all honesty the playing record is nothing to write home about for a club of Liverpool’s glorious history. One League Cup (under King Kenny) and a single qualification for the Champions League is not great, though it would have been a different story if Brendan Rodgers' side had not fallen at the last hurdle in the 2013/14 Premier League, finishing in an agonising second place.

Indeed, Rodgers put his finger on the challenge at Liverpool: “The club needs to decide whether they want a business model or a winning model. Some will think it is about buying a player, developing and improving them and then selling them for a much greater fee; as opposed to getting the best possible player, irrelevant of his age, in order to win.”

To be fair, Liverpool have spent significant sums on bringing players in, but the recruits have often been of dubious quality. Some of this has been attributed to the FSG model, featuring a transfer committee, but it is unclear whether this “Moneyball” approach still holds sway.

Even if the club is not performing too well on the pitch, it is tearing it up off the pitch, as evidenced by the recently published 2014/15 accounts, which featured a massive £60 million profit before tax, up £59 million from the previous year’s £1 million profit.

Ian Ayre said that this was “mainly a result of the sale of Luis Suarez in July 2014”, which increased the profit on player sales by £57 million, though the revenue growth was also impressive, up £42 million (17%) from £256 million to a record £298 million.

Broadcasting revenue was £22 million (22%) higher at £123 million, mainly due to Champions League participation and the domestic cup runs. The additional home games also helped drive an £8 million (16%) increase in match day revenue to £59 million.

Commercial income rose £13 million (12%) to £116 million, due to additional sponsorship from 12 new partnerships and renewals and higher merchandising sales following the opening of 180 new retail outlets around the world including one standalone store in Malaysia.

These improvements were offset by significant increases in player costs: the wage bill surged £22 million (16%) from £144 million to £166 million, while player amortisation was up £20 million (48%) from £41 million to £61 million.

On the other hand, a small credit for stadium development costs meant that exceptional items were £2 million lower, while net interest payable fell £1 million to £4 million.

As Ayre observed, “the club is in rude health financially”, which is confirmed by Liverpool’s £60 million being by far the highest profit of the 14 clubs that have to date published their 2014/15 accounts. The next most profitable clubs are Leicester City £26 million, Arsenal £25 million and Southampton £15 million.

Although football clubs have traditionally lost money, the increasing TV deals allied with Financial Fair Play (FFP) mean that the Premier League these days is a largely profitable environment with only four clubs losing money so far in 2014/15, the largest losses coming from Aston Villa £28 million and Chelsea £23 million.

That said, it is far from unusual for Premier League clubs to report lower profits in the second year of the television deal’s three-year cycle, as there are limited possibilities for revenue growth, while wage bills continue to grow apace. In fact, half of the clubs that have announced 2014/15 figures have reported lower profits, which makes Liverpool’s £59 million growth all the more impressive.

However, it is clear that once-off profits from player sales can have a major influence on a football club’s bottom line, especially at Liverpool, whose numbers were boosted by £56 million from this activity in 2014/15, compared to a £1 million loss the previous year.

The lion’s share of this profit was obviously from Suarez’s sale to Barcelona, but the club also earned money from the transfers of Oussama Assaidi to Al-Ahli Dubai, Daniel Agger to Brøndby and Martin Kelly to Crystal Palace.

This is the second year in succession that Liverpool have reported a profit, following five years of losses that amounted to a hefty £176 million, including an average of £47 million for the three seasons between 2011 and 2013.

In fairness, many of these losses were caused by 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. It should also be noted that the 2011/12 accounts only included 10 months after the club moved the accounting date to 31 May.

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 nine 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). There were also £5 million of legal and professional fees incurred as a result of FSG’s purchase of the club.

In fact, Liverpool would have made a profit of £10 million in 2011 without such exceptionals. These have been steadily reducing and actually produced a £0.3 million credit in 2014/15 against costs previously booked for the stadium development in Stanley Park, though next year’s accounts should include a sizeable payout to former manager Brendan Rodgers, who had three years remaining on his deal when he was sacked.

Profits and losses have also been greatly influenced by player trading. In the six seasons up to 2011, player sales boosted profits (or at least reduced losses) by an average of £18 million a year. This was most evident in 2011 when £43 million of profits on player sales, mainly Fernando Torres to Chelsea, reduced the annual loss from a horrific £93 million to “only” £49 million, though, as we have seen, that was also affected by £59 million of exceptional stadium costs.

However, the club’s ineptitude in the transfer market resulted in three consecutive years of losses on player sales between 2012 and 2014, most notably the sale of Andy Carroll to West Ham.

That drag on the club’s financials spectacularly changed in 2015 with the Suarez sale and we already know from a note in the accounts that the 2016 figures will include £41 million of profits from player sales, mainly the lucrative sale of Raheem Sterling to Manchester City plus Fabio Borini’s permanent move to Sunderland.

"Can you feel the beat?"

Ayre is perfectly aware of the influence of player sales: “Our real financial position is closer to break-even and it is the underlying revenue growth that’s important and provides us with the long-term stability.” Indeed, excluding the £56.2 million made from player sales in 2015 would leave only a small £3.8 million profit.

It is worth exploring how football clubs account for transfers, as this can have such a major impact on reported profits. The fundamental point is that when a club purchases a player the costs are spread over a few years, but any profit made from selling players is immediately booked to the accounts.

So, when a club buys a player, it does not show the full transfer fee in the accounts in that year, but writes-down the cost (evenly) over the length of the player’s contract. To illustrate how this works, if Liverpool paid £25 million for a new player with a five-year contract, the annual expense would only be £5 million (£25 million divided by 5 years) in player amortisation (on top of wages).

However, when that player is sold, the club reports the profit as sales proceeds less any remaining value in the accounts. In our example, if the player were to be sold three years later for £32 million, the cash profit would be £7 million (£32 million less £25 million), but the accounting profit would be much higher at £22 million, as the club would have already booked £15 million of amortisation (3 years at £5 million).

This is all horribly technical, but it does help explain how it is possible for clubs like Manchester City to spend so much and still meet UEFA’s FFP targets.

Notwithstanding the accounting treatment, basically the more that a club spends on buying players, the higher its player amortisation. Thus, Liverpool’s player amortisation has shot up from £34 million in 2012 to £61 million in 2015, reflecting renewed activity in the transfer market. It should be even higher next year, as this figure does not reflect last summer’s purchases of Christian Benteke, Roberto Firmino and Nathaniel Clyne.

Liverpool have also booked around £20 million of impairment charges in the last four seasons, though the vast majority was in 2012 and 2013. This happens when the directors assess a player’s achievable sales price as less than the value in the accounts.

Despite rising by nearly 50% in 2015, Liverpool’s player amortisation of £61 million is still surpassed by the really big spenders like Manchester United, whose massive outlay under Moyes and van Gaal has driven their annual expense up to £100 million, Manchester City £70 million and Chelsea £69 million, but it is now ahead of Arsenal £54 million.

The other side of the player trading coin is that player values have also shot up, nearly doubling from £85 million in 2010 to £166 million in 2015.

As a result of all these accounting shenanigans, clubs often look at EBITDA (Earnings Before Interest, Depreciation and Amortisation) for a better idea of underlying profitability. In Liverpool’s case this metric highlights the major improvement in their finances, as it is has steadily risen from £10 million in 2011 to a very healthy £73 million in 2015.

That’s excellent and is only outpaced by the two Manchester clubs, United £120 million and £83 million, but Liverpool are actually ahead of Arsenal, the poster child of profitability in English football, at £63 million.

However, before people get too complacent, United are projecting astonishing EBITDA of £178-188 million for 2015/16, following their return to the Champions League and their new kit deal.

Revenue has grown by 61% (£113 million) since FSG took over in 2010, though most of this (£92 million) has come in the last two seasons with revenue being relatively flat over the previous seasons. As Ayre stated, “growth in our commercial, media and match day revenues…continues to add strength to out financial position.”

The main growth driver has been commercial income, which has increased by 87% (£54 million) over that period, though broadcasting is also up 54% (£43 million), largely due to the new Premier League TV deals. Match day income has, perhaps surprisingly, also risen by 38% (£16 million).

Even after the 2015 revenue growth, Liverpool remain in fifth place in the English revenue league with £298 million, though they have closed the gap to the top four. Nevertheless, they are still almost £100 million behind Manchester United (£395 million) and over £50 million lower than Manchester City (£352 million).

They are also below Arsenal (£329 million) and Chelsea (£314 million), but are a long way ahead of their other Premier League rivals, being £100 million higher than Tottenham (£196 million) and around £170 million higher Newcastle United (£129 million).

This is the reason for many Liverpool fans’ frustration, as they should have enough spending capacity to do better than the likes of Spurs (and Leicester City), even if they might expect to struggle from a financial perspective against the top four.

In fact, Liverpool’s revenue growth of £42 million (17%) was easily the best of the leading six English clubs last season, both in absolute and percentage terms. United actually saw a £38 million (9%) decline, due to their failure to qualify for Europe, while Chelsea’s revenue also dropped £6 million (2%).

Of course, the boot will be on the other foot next year, as United made their return to the Champions league, while Liverpool only qualified for the Europa League.

Liverpool comfortably retained ninth place in the Deloitte Money League, though the gap to Juventus in 10th place increased from £22 million to £52 million, partly due to the strengthening of Sterling against the Euro. However, even excluding currency movements, Liverpool enjoyed the second highest revenue growth in the Money League last season, only beaten by Barcelona.

That’s obviously a fine accomplishment, but the Money League highlights a new challenge for clubs like Liverpool, as no fewer than 17 Premier League clubs feature in the top 30 clubs worldwide by revenue, thanks to the TV deal. This means that the mid-tier clubs have more purchasing power than ever before, so are more competitive as a consequence.

If we compare Liverpool’s revenue with the other clubs in the Deloitte Money League top ten, it is immediately apparent where their main problem lies, namely commercial income. Liverpool’s £116 million might seem pretty good, but it is substantially lower than most of the elite clubs.

Granted, the £110 million shortfall against PSG (£116 million vs. £226 million) is largely due to the French club’s “friendly” agreement with the Qatar Tourist Authority, but there are still major gaps to the other clubs in commercial terms: Bayern Munich £95 million, Manchester United £84 million, Real Madrid £72 million, Barcelona £69 million and Manchester City £57 million.

This makes it all the more perplexing that the owners would focus on match day income and try to “nickel and dime” the community, when the larger opportunity is surely in the commercial arena.

On the plus side, Liverpool are very competitive on broadcasting revenue, only really losing out compared to the individual deals negotiated by Real Madrid and Barcelona, and Juventus, who were boosted by particularly high Champions League distributions last season.

Actually, match day only accounts for 20% of Liverpool’s total revenue with broadcasting (41%) and commercial (39%) far more important, following the huge growth in these revenue streams.

Liverpool’s share of the Premier League television money fell £5 million from £98 million to £93 million in 2014/15, largely due to lower merit payments for only finishing in 6th place in the league, as opposed to finishing second the previous season.

The only other variable element in the Premier League distribution is the facility fee (also 25% of the domestic deal), which depends on how many times your team is broadcast live. Liverpool always do well here, due to their box office appeal. 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, there will be a substantial increase from the mega Premier League TV deal starting in 2016/17. My estimates suggest that Liverpool’s 6th place would be worth an additional £46 million under the new contract, taking their annual payment up to an incredible £138 million. This is based on the contracted 70% increase in the domestic deal and an assumed 30% increase in the overseas deals (though this might be a bit conservative, given some of the deals announced to date).

The other main element of broadcasting revenue is European competition with Liverpool receiving €33.6 million for Champions League participation plus an additional €0.5 million after dropping down to the Europa League, where they were eliminated by Besiktas.

Here it is worth noting the importance of the TV (Market) pool to the Champions League distributions. Half of the payment depends on how far a club progresses in the Champions League, but also how well the other English clubs do. In this way, Liverpool’s share was smaller than the other English clubs, as they went out at the group stage, while the others reached the last 16.

The other half of the market pool is based on where the club finished in the previous season’s Premier League, so Liverpool did well here, as they finished 2nd in 2013/14, giving them a 30% share (1st 40%, 3rd 20%, 4th 10%).

Incidentally, the reason why Juventus received such an enormous slice of the Italian market pool is that they only had to share it with one other club (AS Roma), while the UK pool was split between four clubs.

Having won the European Cup/Champions League five times, nobody needs to explain its importance to Liverpool, but the club’s failure to qualify for Europe’s premier tournament more than once in the last five years has really hurt their bank balance.

In that period, Liverpool have earned €45 million from Europe, which is around €100 to €180 million less than the top four received – and that does not include revenue from additional fixtures and sponsorship clauses. That’s a huge competitive disadvantage and makes it all the more difficult for Liverpool to break into the Champions League qualifying places.

The financial significance of a top four placing is even more pronounced from this season with the new Champions League TV deal worth an additional 40-50% for participation bonuses and prize money and further significant growth in the market pool thanks to BT Sports paying more than Sky/ITV for live games.

Match day income grew by £8 million (14%) from £51 million to £59 million, mainly due to seven more home games from European competition and domestic cup runs, with the average attendance virtually unchanged at 44,659. This means that match day income has increased by a total of £14 million in the last two seasons.

That’s good news, but Liverpool’s match day income is still miles behind Arsenal (£100 million) and Manchester United (£91 million). In order to address this difference, FSG plan to expand the Main Stand capacity by 8,500 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 £5 million for naming rights for the stand, though a partner is still not in place. Importantly, the club would keep the famous Anfield name for the stadium as a whole.

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. Indeed FSG has already loaned the club £49 million for the initial expenditure.

Ayre stressed the importance of the stadium expansion: “The new Main Stand at Anfield is another significant investment by this ownership which is vital to the health of the club and part of our long-term strategy to ensure we remain competitive and sustainable.”

He added, “It gets us towards the capacity we want, and at a better cost than building a new stadium”, though the 25,000 fans on Liverpool’s season ticket waiting list may have preferred the more expansive option.

"Miss You"

Although this all sounds very promising, especially given the numerous false starts in the past, it does not really excuse the owners not addressing the supporters’ concerns over ticket prices, especially in light of the growing TV riches. This is a great opportunity for football clubs to make prices more affordable and avoid the traditional fan base being priced out.

According to the BBC Price of Football survey, Liverpool have the fourth most expensive cheapest season tickets, only behind the big London clubs (Arsenal, Tottenham and Chelsea), but there is obviously a vast salary gap between those two markets.

While it is understandable that the board would want to narrow the match day income gap, the stadium expansion will go a long way towards that without price gouging the fans. In any case, the owners finally recognised the value of the supporter base and abandoned their plans and froze prices. That said, that gesture has since been effectively trumped by Everton actually reducing ticket prices by 5%.

Commercial revenue rose £12 million (12%) from £104 million to £116 million, mainly due to additional sponsorship and merchandising sales. New sponsor deals included Garuda (training kit), Subway and Dunkin’ Donuts, which is an example of Liverpool’s stated strategy of “leveraging the club’s global following to deliver revenue growth.”

Liverpool’s commercial income has overtaken Chelsea (£108 million), though the Blues will be boosted next season by their new shirt deal with Yokohama Tyres, but it is still a long way below Manchester United £197 million and Manchester City £173 million.

To reinforce this point, Liverpool’s commercial income growth of £36 million over the last three seasons is only better than Tottenham of the leading English clubs. In the same period, Manchester United have increased their commercial income by £79 million – and that’s before United receive the full benefit of their massive new Adidas kit deal. In fact, the gap between Liverpool and United has grown from £10 million in 2009 to £81 million in 2015.

Liverpool have extended their shirt sponsorship deal with Standard Chartered by three years to the end of the 2018/19 season, increasing the annual payment from £20 million to £25 million (though some reports suggest that this might be as high as £30 million). That’s not too bad, but is lower than Manchester United £47 million (Chevrolet), Chelsea (Yokohama) £40 million and Arsenal (Emirates) £30 million.

Liverpool’s “record” New Balance kit deal is basically 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 is still lower than 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.

Wages increased by £22 million (16%) from £144 million to £166 million, though the underlying growth is even higher, as the previous season included high bonus payments “as a result of the impact of the 2nd place Premier League finish.” The number of employees rose from 567 to 636, largely in the administration, commercial and other department.

The highest paid director, presumably Ayre, received an inflation-busting 16% pay rise from £1.0 million to £1.2 million, which is nice work if you can get it.

Despite this wages growth, the wages to turnover ratio was maintained at a very respectable 56%, which is around the same level as the likes of Arsenal (58%), Tottenham (56%) and Manchester City (55%).

Liverpool’s £166 million is the 5th highest wage bill in England, exactly in line with revenue. Chelsea once again have the highest wage bill in the top flight at £216 million, which is the first time since 2010, ahead of Manchester United £203 million, Manchester City £194 million and Arsenal £192 million. There is then a big gap to the other Premier League clubs with the nearest challengers being Tottenham (2013/14) £100 million and Aston Villa £84 million.

What is interesting is how the wage bills at the top four clubs have been converging around the £200 million level. Both Manchester clubs actually saw a reduction in wages in 2014/15. United’s decrease was due to their lack of success on the pitch, as bonuses fell, while City’s is partly due to a group restructure, where some staff are now paid by group companies, which then charge the club for services provided.

Liverpool’s gap to Arsenal in 4th place has remained fairly constant over the last there seasons at around £25 million.

The different investment policies of the last two sets of owners can be clearly seen by looking at the net transfer spend: in the five years leading up to the FSG takeover the club averaged net spend of just £10 million, but this has tripled to £30 million in the five 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. In the 2014/15 season alone, Liverpool bought Adam Lallana, Lazar Markovic, Dejan Lovren, Mario Balotelli, Alberto Moreno, Emre Can, Divock Origi and Rickie Lambert.

As Ayre said, “We are very fortunate in that everything we generate goes back into the team”, though many would argue that the proceeds of the Suarez sale have not been wisely reinvested, as there seems to have been a focus on quantity rather than quality. Furthermore, Liverpool spent more last year on agents’ fees (£14.3 million) than any other club in the top flight, which is a fairly damning indictment.

Even with the increased activity in the transfer market, Liverpool have still been significantly outspent by some clubs over the last three seasons, maybe understandably by Manchester City £241 million, Manchester United £199 million and Arsenal £111 million, but also by West Ham £79 million. They have also been nearly matched by Newcastle £71 million, Everton £65 million and Crystal Palace £65 million.

Legendary Liverpool defender Alan Hansen suggested that the club would need to spend £200 million “to have a real go”, but he cautioned, “From what I understand FSG have told the manager it is not a bottomless pit. So the problem Klopp might have is that the owners have invested so much already, will they be reluctant to do it again?”

Gross debt has reduced by £28 million from £127 million to £99 million, comprising bank loans of £50 million (down from £58 million) and £49 million from the owners in order to fund stadium expansion work. Note that the reported net debt excludes £20 million owed to the subsidiary Liverpoolfc.TV Limited.

The previous £69 million owed to FSG has been converted into equity. As Ayre said, “It’s effectively writing-off that debt for the club and putting us in a healthier position. It’s another great example of the commitment that the owners make to the club.” The owners would only get this money back if they were to sell the club.

Maintaining their customary position, Liverpool’s gross debt of £99 million is the 5th highest in the Premier League, though is much less than Manchester United, who still have £444 million of borrowings even after all the Glazers’ various re-financings, and Arsenal, whose £232 million debt effectively comprises the “mortgage” on the Emirates stadium.

It is also worth highlighting that the club’s debt position is stratospherically better than the shocking levels reported under the previous owners. 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 £13 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 £4 million from other clubs. The accounts also note that the net amount payable in transfer fees arising from this summer’s transfer is £37 million.

It is worth noting that the net interest payable of £3.6 million has come down significantly since the bad old days of Hicks and Gillett, when it peaked at £17.6 million in 2010. As a comparison of what might have been, Manchester United incurred £35 million of interest costs last season as the price of their leveraged buy-out, while Arsenal have net financing costs of £13 million.

The amount of cash Liverpool generate from operating activities has been increasing, reaching £65 million in 2015, after adding back non-cash expenses like player amortisation and depreciation. Nevertheless, they still required £49 million of funding from FSG to cover their cash outlay, as they spent a net £59 million on players (gross £96 million), £40 million on the stadium development, £9 million on bank loan repayments and £3 million interest payments.

In the five years since FSG bought Liverpool, the club has had available cash of £320 million. Less than half of this (£146 million) has come from operating activities, while £114 million has been provided by the owners in the form of loans and a further £46 million from the bank facility.

Nearly two-thirds of this funding has been seen on the pitch with £211 million spent on net player recruitment, while another £55 million went on infrastructure investment. An outstanding stadium loan of £38 million was repaid, while £16 million of interest payments on external bank loans have been required.

Unlike other American owners, FSG cannot be accused of hoarding cash, as Liverpool only have £4 million in their bank account. In stark contrast, Arsenal had £228 million and Manchester United £156 million.

It is difficult to disagree with Ayre’s view that Liverpool are “making good progress”, but the question remains whether the club can break into the top four, given that it is ranked fifth in just about very category (revenue, attendance, wage bill, debt).

Whether Klopp is given enough funding to successfully overhaul his squad is debatable, but at least Liverpool now have a manager that everybody can get behind. Not to mention the fact that the German has already demonstrated his ability to revive a sleeping giant at Borussia Dortmund.

"I'm in love with a German film star"

The owners are keen to stress that they are ambitious to win trophies: “We have great conviction in our world-class manager and our young, talented squad and know that in time the on-pitch success we all crave will be realised.”

That’s easier said than done, of course, but after a period of stability, Klopp might just be the man to bring the glory nights back to Anfield. Whichever way it goes, it’s sure to be an exciting ride.

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.”