Untold Arsenal: Arsenal News. Supporting the Lord Wenger in all he does » Imagine a top EPL club being owned and run by its bank. Stop imagining – it’s true.
By Phil Gregory
Before you start reading, check out What’s really going on (if you haven’t already). It explains all of the terms and whatnot, which makes all that follows easier to, well, follow.
Liverpool FC hasn’t been out the news for much of last season for both financial and on-field reasons. It’s probably best to forget the drudgery that was served up on the pitch this last season, as the accounts contain more than enough bad news for the scousers.
Core business and operating profit
As with Manchester United, Liverpool’s core business is profitable, with an operating profit of £25million in 07-08 rising to over £27million. That has much to do with Liverpool’s enormous £67.7million of commercial revenues, only £2million pounds less than the marketing machine that is Manchester United while match day and TV revenues also show strong growth.
Debt
Unfortunately, operating profit doesn’t take into consideration interest charges and the like, which accounted for £38million and £40million in the last two years, and helped debt balloon from £244million (06-07) to £351million in 08-09.
As you can quite clearly see, like United the interest more than accounts for the operating profit, and amortisation, depreciation and tax are all not taken into consideration by an operating profit figure either.
Constant net spends on player transfers won’t have helped, with Benitez’s rotating-door transfer policy (in one season, out the next and generally at a loss). Unfortunately I can’t cite any player trading or amortisation figures, as in their wisdom the club bundled player trading and amortisation together in the accounts, making it totally useless in comparing to other teams’ financials. It’s a shame, as the player trading figures would have done nicely to undermine the whole “Rafa had nothing to spend” myth that seems to be quite commonplace.
Interest payments
Either way, you don’t need to be a an accountant to look at the growth in the debt figure and conclude that it is not all as a result of interest payments. The interest payments are roughly £26million more than the operating profit over the two years cited, yet debt grew by nearly £100million leaving £76million to have come from elsewhere. I’ll let you draw your own conclusions there.
The wages of sin
The problems get worse when you consider that wages grew by over 10% between 07-08 and 08-09 to £102million. These figures should only serve a a rough guideline for comparing with other clubs, as they include backroom staff and directors’ wages in the wage figure. However 10% wage growth can’t be ignored and they are one of only four clubs (no prizes for guessing which four) that have a wage bill of more than £100million a year.
That said, wages are only 55% of turnover, or 10% below the Premier League average and comfortably within the maximum recommended level of 60% (but a higher percentage than our Arsenal). Still, the wage level isn’t worrying if they can maintain the revenue levels of the 08-09 season (stop laughing).
TV Revenue
In 08-09 season they came second to United and performed admirably in reaching the Champions League quarter finals. A seventh place finish this time around will cost them £3.75million in terms of the performance related component of the TV money, while simply participating in the group stages of the Champions League is lucrative, even when they are not making the knock-out rounds. The Europa league pays a lot, lot less than the Champions League.
In 08-09, TV revenues contributed over 40% of Liverpool’s total turnover. Clearly they’ll still get a substantial sum of money courtesy of playing in the Premier League, but with a greater percentage of their revenue coming from TV than Arsenal or United, they are the side who would be expected to struggle the most with the loss of the Champions League money. My prediction for the 09-10 accounts: operating profit to roughly halve.
So the big shortfall will be in the 2010-11 accounts, when they don’t have any Champions League revenue whatsoever. Whether their fall from grace on the pitch affects how much they are featured on TV remains to be seen but with 25% of the TV money dished out on a by TV appearances basis, they’ll hope they haven’t lost too much appeal in the eyes of the broadcasters.
Unless the owners can sell up and shift the debt on/reduce it substantially, I’d expect them to turn an operating loss during this season, and when you tack on the interest bill, an overall loss of around £70million would not surprise me in the slightest.
The bank
For me, the biggest issue with Liverpool is that they are existing courtesy of the goodwill of a bank, RBS which has now got cold feet and wants it’s money back. Liverpool have consistently missed deadlines to pay back part of the debt they hold, and such a failure can only be taken as a sign of severe financial weakness. The fact that the only possible way for them to pay off a substantial part of the debt is through selling to a third party speaks volumes.
If you are unfamiliar with the politics of Britain, RBS are majority owned by the British Government, meaning they are subject to all manner of political meddling. You’ve only got to look at America to see how politicians do untold damage for political gain (every time Barack Obama slates BP and forces the share price down, he’s hurting American investors who hold around 20% of BP shares). With government debt and deficit cutting right at the top of the agenda, it is not unreasonable for RBS’s goodwill to be cut short by political pressure.
Such action won’t hurt the bank: they’d get their money back during liquidation of the clubs assets (i.e. selling players and the training ground at the very least) so they wouldn’t be writing off substantial percentages of the debt. Yes, it wouldn’t be politically popular with half of Liverpool, but that would be a drop in the ocean compared to what would happen if a government-owned bank lost a fortune propping up a football club.
Where can they go from here?
I thought throughout the 09-10 season that Hodgson would do a better job, but he now inherits a hell of a mess. If the Americans can sell the club, the size of the debt will fall when RBS get their £100millionm, and with it the interest bill. This should bring the interest bill down to a level where it can be covered by the operating profit and this would make the debt stop growing. Such action will have to coincide with restraint in the transfer market, given how much of the recent debt growth is likely to be attributable to spending on players.
If they can’t sell the club quickly, Hodgson is likely going to have to cut the wage budget in order to reduce the club’s costs so they can at least cover the interest and stop the debt growing further. I’d expect them to sell one of Torres, Mascherano or Gerrard to provide Hodgson with some capital to strengthen the glaring holes in the squad and to pay down the debt, but nothing is certain. He’d be a miracle worker if he could get them into the Champions League next season even with those three still part of the squad but I just don’t see it happening with City strengthening.