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.
Who feel that life is but a joke
Here we go, Rafas transfers:
http://www.liverweb.org.uk/benitez.asp
Rafa’s net transfer spend of approx £62m over his 5 years isn’t all that bad I don’t think. What has been bad is a lot of the players that have been sold, such as Belamy, Crouch, Sissoko, Riise, Robbie Keane etc, (these players didn’t want to leave either) were very good players that should have been kept on. Rafa played roulette too much with his purchases, and it came to a head last season with a lack of quality squad depth IMO, being largely responsible for their poor results.
They are in a mess, there is no doubting it, and I can understand why they have turned to Roy Hodgson to try and steady their ship. He did a great job with Fulham, turning them into a real good team, with some shrewd buys. Who’d have thought the likes of Dickson Etuhu (he was especially useless at Sunderland), Zoltan Gera, John Panstil etc would have cut it, looking at their records at previous clubs, but he got them playing in a system that suited them and got the best from them with good team spirit. However, will Liverpool accept similar kinds of signings at their club, and will he be able to gel players in the same way as at Fulham? Will be interesting to see what happens there next season definitely. Lets just hope he starts to get them playing after the first match against us!!
As to what will happen to Liverpool regarding a sale, I would be very worried if I were a Liverpool fan. Who is out there with the resources to buy them without leverage. Whoever does buy the club will have to pay off the debt for starters (so the purchase price will be at least £350m plus whatever the Yanks want as a profit figure – I can’t see them walking out without at least having made something from it), and then there is the stadium to consider – although a debt free Liverpool should be able to raise the finance in a similar way as Arsenal did you would imagine. But as Phils article points out, CL money means so much to many clubs today, and if Liverpool miss out for another season, unless an Arab billionaire buys them a la Citeh, then it could be harder and harder for them to get back and to also finance any repayments on a new ground. Good luck Roy!
I never could and still can’t understand why liverpool supporters insist on blaming the owners!! Their fall had nothing to do with them, as they provided the funds that bought the flops that have passed through the circus that is now liverpool football club! Rafa has always had money but just spent it stupidly!! Hodgson has a great opportunity to sell the dead wait in the team and put his own stamp on the team, first out should be Masherano who to me, maybe because im a gunner, is nothing but a glorified hacker! Song is a much better player but only began getting credit last season, where as his spell at Charlton was where every one could see he is a top player, and i believe he is a permenant and a suitable repalacement for Vieria. Back to Masherano for who for some reason is priced in £20mil+ zone, if they’re stupid enough to pay it take it, then offer Fulham £9mil for Etuhu! Who to me is a much better prospect, as he can do what masha does but can also pass!! Liverpool need to offload Rafas Rejects before thinking about whats next! For me he is a terrible manager and to the end made so many wrong decisions that he must have purposely be making them to get his pay off!! So I dont blame the finances for Liverpools fall, i blame bad management
Thanks for the link Amadeus. My issue with such figures is they tend to understate the cost of the transfer as they go by figures in the media. So if a player is bought for £10m, and sold for £5mill, the website will consider that a loss of £5m, but there will be numerous other charges involved too. Hence a rotating door transfer policy will invariably cost the club more than the difference in the transfer fee alone.
Mascherano is a great player, but only at what he can do. He excelled when he had Alonso next to him to do the passing, but with Lucas similarly limited, they badly lacked creativity in the middle .
Jason, I think the owners are to blame in the sense that they bought the club saying they would not do a Man U in terms of the finance, and they promised that work would start on the new stadium “within weeks”.
Then they simply put all the debt into the club, and did nothing about the stadium. That in turn got the banks angry and has led to the banks demanding their money back.
Even if Benitez had won them the league every year and broken even on transfers, their income would have been only marginally more, (the ground is full after all), and they would still have been unable to pay back the £100m when asked for it this year (having paid back a load last year).
So in that regard the owners are to blame. Their lack of money means that they are going to run out of the means to pay their players soon – just like Barca.
I think Roy Hodgson will do a great great Job at liverpool, they still have some good players and they should have one the title the season before last. clearly there was a problem with Benitez man management, Gerrard scratching his head etc, I think he lost the dressing room. I think things will be different for them,
I also believe we will see the Ryan Babel that arsenal were interested in, the point is liverpool have a good first 11, a good spine and a fully fit Torres can do some serious damage
Personally I think or I am hoping it is man u who will be in trouble because own goals and rooney are the only ones who scored last season, Rio cant play a full season, scholes, giggs Neville have to rely on walking sticks and the rest how many of them would get into the Arsenal squad, the only player I would take from Manu is obertan, interestingly I would take a few of the liverpool players
Phil – As always an informed interesting piece but I do have a query. I thought Liverpool were £80 odd million in debt before Tweedledum and Tweedledee bought the club. Rick Parry spent a good couple of years whoring Liverpool all over the world to any potential investor and offering to drop his trousers and bend over if the price was right. After all this was not an aggressive, unwanted buyout like ManU. If Liverpool have been showing an operating profit recently was the situation the same before the buyout? If so why did they need investors for the new stadium to go ahead?
Marc, unfortunately I only have the figures for Liverpool for the last two years. It’s a long story involving a nightmare trying to find the right company amidst more holding companies than you’ve had hot dinners, and once I’d done this I didn’t fancy doing it all over again to find the company that existed pre-takeover! So I can’t definitively comment on the figures pre 07-08
However, I’d assume it is just a case of wanting to take the club further. At the time of the takeover, wages weren’t a massive percentage of turnover (55.1%) but if the club were going to push on it much more than they were, they would have been doing so on an unsustainable basis. With wages such a sensible level, it seems likely to me that w=they were concerned by this.
I’d imagine they thought “let’s sell up to someone with big bucks who can build a stadium and fund a spending spree and bring the title home”. Naturally, that hasn’t happened as they took the money and sold to a pair of clowns.
As I said, I haven’t seen the figures pre-takeover, but it’s most likely they were profitable then, but not massively, so there wasn’t much scope for pressing on with both a stadium development and boosting the squad as well, themselves. Most likely, they felt they couldn’t do both of these, as interest payments would’ve accounted for most if not all of the operating profit, and then how do you strengthen the squad sustainably and/or pay down the debt to save money in the long run?
Remember, Arsenal we had the property development side of things as an additional (and highly-successful) way of paying down the debt too, as well as a manager who had a squad who would improve year-on-year due to their age (saves money on transfers) and who could routinely buy quality unknown players for low fees, as well as consistently making a profit in the transfer market. All of that helps in staying competitive at the same time as paying down the debts, two things I don’t think many other clubs could consider doing without someone like Wenger at the helm.
Yes Tony, I understand your point completely, but thats futuretense, the banks came knocking after Rafa spent £20mil on Aquailani last summer so in terms of last season, it was completely Rafas fault. Issues such as planned stadiums and lack of future funds should not have affected Liverpool last season. Failure to bring in good players and not giving top players like Keane, Crouch and last season Babel a chance to play was the manager not owners so was the decision to sell Alonso.
But the future is all in the hands of the owners, to whom you must credit for realising change was needed but must faulture for how they made most things public!
Can i add that i was reading some comments on Sky earlier about our new signing, Koscielny, and some of the supports really laid into the decision of signing the ‘unknown’ but seem to forget that our scout monitor players for sometimes several seasons before buying a player. Some were saying that if it fails this year then Wenger should go! When did our supporters become so negative??
And i know this will get a bad reaction but i really think Seann St Ledger would do a great job next to Vermealen, and would be realitively cheap, if we can’t get Cahill. I say this because both play right eentre back, where we still need to add, Koscienly is left side, so expect another defender to be starting 11 next season!!
The only way LFC can continue as a business (as opposed to a charity) is to sell the players on the highest earnings, bring in those on £25 – 40k a week who perform brilliantly as a team and hope that Chelsea, when forced to operate within their means, are a fair target to compete against for a fourth ECL slot.
They could raise £100m+ selling Torres, Gerrard and Mascherano and the already off-loaded Benayoun. They might ‘do a Wigan’ and bring in some foreign unknowns for a combined £50m who they sell for double the money in a year or two whilst generating operating profits of £40m through frugal attention to finance. If they did that successfully for 3 years, they might bring the debt down to £100-150m. At which point debt would be just below annual income….hardly simple though………in fact, I doubt it’s been done too often before……….
Of course, RBS could turn its loan into equity and then demand to sell the shares to the fans, although whether many would agree the strike price RBS would want is up for grabs……whether the fans would see anything for their support is anyone’s guess……….likely to raise the intensity of bickering 5 fold IMHO….
And finally, LFC could find its own Mike Ashley who comes in, pays off the debt and pays to build a new stadium. £1bn in readies, not £200m.
Not an easy set of choices……..
I am wondering if liverpool would have been in this mess if they built a new stadium say 10-15 years ago after all they are such a big club with a pretty small stadium, even now chelsea, arguably spurs, Manu and arsenal are light years ahead
Rhys: I doubt they’d even have to do something that dramatic. For me, if they sold mascherano and reinvested half of the 25-30m proceeds they could challenge at the top. Their issues was the fact that a Lucas-Masch centre midfield could not pass. It wouldn’t be hard to find a solid central midfielder to go next to lucas who could pass reasonably well.
Then perhaps another winger and a leftback and they wouldn’t be in too bad shape. I loook at someone like Warnock (who they sold) and think he could really improve that side.
A very interesting situation, in one way Hodgson is on to a winner because he can’t fair much worse than last season, but if Liverpool need to sell their best players then this is a bad situation, unless the manager makes some very astute signings to replace them; he’s good but not that good. Liverpool will possibly finish in the top 6 next year and maybe do well or win a minor competition, but I doubt this will pacify the fans, this is Liverpool, not Fulham