Author Topic: Here's how the Forbes guys royally screwed up their $822M Valuation (£515M)  (Read 25603 times)

Offline Johnny C

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(note:  if you don't want to read through all this just scroll to the 3 parts in red)
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Ladies & Gentlemen... Meine Damen und Herren ~


Meet Peter J. Schwartz, Paul Maidment and Michael K. Ozanian.
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Schwartz..............Maidment..............Ozanian
(click)....................(click)....................(click)
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These guys are the researcher and two editors at Forbes who came up with that $822M valuation (£515M) of LFC.  You know... that same valuation that Hicks is using in his argument to block the sale of the club.

I should start out by saying that these guys are journalists, they aren't professional investors or bankers or consultants, and even then some of their "journalism" is down right EMBARRASSINGLY BAD.  So for them to even be attempting to come up with expected "valuations" of clubs (let alone publishing those expected "valuations") is a little preposterous.

Judging from their backgrounds, Schwartz likely did the grunt work crunching numbers, Ozanian signed off on the valuations, while Maidment probably just slapped his name on there because he was Executive Editor of Forbes.com.


I am an institutional investor.  I trade equities all day here in NYC and I do so by understanding a company's fundamentals.  I've been doing it for a number of years.  And one thing that I can tell you is that determining "Valuation" is more Art than Science.


I'll give you an example of what I mean by that :
  • Company ABC and Company XYZ are in the same industry
  • Same revenues
  • Same profitability
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All things being equal, you would think that both these companies would have the same value.

Wrong.

It turns out that Company ABC has a valuation of £900M and Company XYZ is valued at £300M.


Why the big 3X difference in valuation if the numbers and the make-up for both companies are the same ?
Why is Company ABC trading at triple the price-to-sales ratio ?
Why is Company ABC trading at triple the price-to-earnings ratio ?


This is where the "Art" comes in...
  • It turns out that Company ABC has a killer management team, while Company XYZ's are bottom of the barrel
  • It also turns out that Company ABC can pay their debts, while Company XYZ can't
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"Okay", you say... "I get that Company ABC should have a higher valuation because of those factors, but why is it a 3X difference?  Why not 2X?  Why not 1.5X?"
Great Question !  And that is EXACTLY one of the places where these Forbes guys screwed up.  They have no concept for the "Art".  They don't know how to determine the valuation multiple.


At the beginning of the Forbes article, this is what they say about how they are determining these valuations :
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So what does that highlighted part mean ?
It means that they are coming up with their "valuations" based off of the clubs' revenues.  They are looking at what the club did in revenues in the previous year, multiplying it by some number and coming up with their current valuation.


Sounds simple enough... So what number did they pick to multiply the revenues by ?  (pardon my crude chart)
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How the heck did Forbes come up with a 2.7 price-to-sales multiple for Liverpool ?
Well at the beginning of the article they did say "Our team values are calculated using revenue multiples based on historical transactions."  Okay fair enough.  So let's go back and look at the most recent "historical transaction" for Liverpool.  Let's see what revenue multiple Hicks & GG valued the club at in pre-world-wide recession 2007 when they purchased this fine club, which I remind you had basically zero debt at the time.


In 2007, Hicks & GG bought Liverpool for £219M.  In the 2005/06 season Liverpool had revenues of £122M.  That's a price-to-sales multiple of 1.8X.  1.8X ?!?  That's a long LONG way from the 2.7X multiplier that the Forbes guys just used.

So if Forbes was really basing their multiples on "historical transactions" they would have used a 1.8X price-to-sales multiple.
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Let's see what Forbes' valuation would have been if they used that 1.8X price-to-sales multiple that Hicks & GG used in 2007 when they purchased the club:
  • (LFC 08/09 Revenue)  X  (price-to-sales multiple)  =  Valuation
  • ($304M)  X  ( 1.8 )  =  Valuation
  • $547M  =  Valuation
  • or converted to pounds £340M
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And remember that 1.8X multiple was used for a Liverpool club that had ZERO debt at the time, and we just came up with a number that puts the club at £340M.  Also remember that 2007 was before any world-wide recession.  It was before half of the EU was bankrupt.

Tack on the current debt and the fact that the club structure can't pay the debt let alone even the interest payments and do you think that multiple should get bigger or smaller ?  That's right, smaller.


So it definitely shouldn't be 1.8X.  That's too high given the debt, let alone the economy.  Should it be 1.5X or 1.2X or even 0.9 ?
  • A 1.5X price-to-sales ratio gets us to a £285M valuation.
  • A 1.2X price-to-sales ratio gets us to a £225M valuation.
  • A 0.9X price-to-sales ratio gets us to a £170M valuation.
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I don't know what the right valuation should be (I haven't done the exercise yet)
But the takeaways for us should be :
  • Henry's NESV offer of £300M does not under value the club.  If anything it OVER values it by a considerable amount.
  • These Forbes guys did some bad bad really bad work.
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Okay, so it's bad enough that they screwed up the "Art" when it comes to determining the multiple...But what is inexcusable is that Forbes didn't even value these clubs using the same criteria...

i.e. Forbes forgot to include DEBT in their valuation for some clubs, but included it for others.
  • Guess which club Forbes didn't consider the debt when placing a value on it....  You got it.  Liverpool.
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Here's the fine print from that Forbes article :
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That's just DUMB. Take a look at their valuation table and see what I mean.

Normally when you are going to compare things you measure them like-for-like.  You don't compare apples to oranges.  But that's exactly what Schwartz, Maidment & Ozanian did.

I have no problem with Forbes putting out lists like that and taking a stab at the valuations.  I enjoy looking at it as much as anyone.  But this was just shoddy work.  They should really be ashamed.


So, more importantly, what does all this mean for Henry, Broughton, Purslow, etc... ?
  • They are going to be able to SHRED Hicks' ludicrous $822M Valuation (£515M), based off of what I highlighted above.  The fact that Hicks keeps slinging that Forbes valuation around is going to bite him in the rear-end.  He's obviously doing it to sensationally highlight to the press & Courts the big £215M difference in numbers £300M (Henry) vs £515M (Forbes), but in reality that Forbes valuation has no meaning.
« Last Edit: October 14, 2010, 07:15:00 PM by Johnny C »

Offline Alan_Xmas

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Jonny - the other big number valuation was the $1bn that FBR Capital put on the club in September when Hicks was trying to con obtain finance from GSO. The same FBR that offered just £375m on October 4th. Any thoughts?
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Offline Mackeroo

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Johnny you've outdone yourself mate. You certainly don't believe in the one liners I'll give you that. Kudos.

The thing I can't believe is that THicks actually referenced the Forbes valuation in his TRO, and how that if we were worth so much he must be the victim of an epic swindle. Seriously, anyone who thinks we are valued anywhere near that is completely deluded.
You are either his son or just a total fuckin wanker who I will meet anytime outside the ground to fight if you have any idea where the ground is yer faggot!

Offline 5BigCups

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The thing I can't believe is that THicks actually referenced the Forbes valuation in his TRO, and how that if we were worth so much he must be the victim of an epic swindle. Seriously, anyone who thinks we are valued anywhere near that is completely deluded.

Thats like trying to justify sacking Rafa by saying that he read in the 'Daily Star' that it was the right thing to do :butt

Offline Mackeroo

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Jonny - the other big number valuation was the $1bn that FBR Capital put on the club in September when Hicks was trying to con obtain finance from GSO. The same FBR that offered just £375m on October 4th. Any thoughts?

He has friends in FBR who were trying to do him a favour? Seriously though Alan, those figures don't even come anywhere close to adding up. In a little over a month we went from being valued at £700 odd million to somewhere in the region of £350-£400 million. I know the debt increased due to penalty fees etc, but someone is trying to pull the wool over someone's eyes.
You are either his son or just a total fuckin wanker who I will meet anytime outside the ground to fight if you have any idea where the ground is yer faggot!

Offline muchtyred

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Great post Jonny!

This guy has a lot of powerful allies, but hopefully in the end even they will see him for what he really is!!

Also how unprofessional does this make Forbes look!!

Online The 92A

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Good post, explained it even to me who has no financial background.

Offline Yakyb

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great post thank you

im  sure Broughton etc all know this but perhaps this should be forwarded to a certain judge in Dallas

Offline kopitecrash

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Get to court and destroy that muther fucker at 2 today. That is excellent research.
I know what you mean. I really wish the Madrid born former Real Vallodolid, Osasuna, Tenerife, Extremadura, Valencia and Inter Milan manager stayed loyal and faithful to a foreign club that sacked him by never managing another club again. Burn him.

Offline main-stand-molby

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magnificent Johnny, thanks.

Offline Jimmy Conway

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Excellent work Johnny.  8)

Offline Brother Mouzone

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Great work - even picked up by the Guardian!
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Offline bellinter

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Thats an excellent read there Johnny and clears up a few bits of confusion I was having. Hats off
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Offline rob1178

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This article has just been posted up on the guardian blog. Great work.
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Offline Jason_King

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Sterling work there, thanks for that
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Offline IndianaRed

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nice one

Offline shankstheman

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A great synopsis of the way a valuation works.
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Offline granbybuck

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Sterling work yet again Johnny and explained in a manner even simpletons such as I can understand.

Your research is much appreciated. Thanks.

Offline Cracking Left Foot

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Johnny, your posts are excellent. Any chance of getting to the High Court this afternoon and persuade Martin to take you into the hearing with him?
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Offline Johnny C

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Jonny - the other big number valuation was the $1bn that FBR Capital put on the club in September when Hicks was trying to con obtain finance from GSO. The same FBR that offered just £375m on October 4th. Any thoughts?
Good question.

I think the first thing that we need to understand is that NONE of yesterday's/today's events are a surprise to LFC/RBS/Henry/Hicks/Mill etc...
Back in April when RBS refinanced the debt all these guys knew what this week was going to be like.  They all knew the steps that each other would take.

So understanding that, you can see that Hicks would need some ammo when it comes to claiming a higher valuation for the club.  So what does he do...?  He pays FBR a fee and tells them the multiple that he wants for the club (wink wink nod nod).  He then takes this "independent" valuation from FBR and goes to GSO, knowing full well that GSO are going to shoot him down.


The purpose of him going to GSO wasn't to get financing (he knew they'd never touch him now).
Rather the purpose of him going to GSO was simply to document for the various Courts that he had a meeting with $1B valuations (£625M) being thrown around.

Seriously think about that...  Think about what kind of character would do that.  This guy has been planning for these exact legal events for months and months and months.  This is one serious guy and absolutely not to be underestimated.


Anyway, regarding these "offers" & "valuations" that he's talking about.... I don't buy that BS at all.  None of them were real.
Specifically regarding FBR, they are a chop-shop when it comes to banking.  3rd-rate.  Sorry if I offended anyone who works there, but they are not the highest quality. (same with Mill Capital for what it's worth).  FBR don't have the transactional banking expertise in-house to put a proper multiple on LFC (let alone an actual "offer" to buy the club)


And as far as $1B valuation (£625M) goes...  Think for a second what that means.
Hicks purchased the club 3-and-a-half years ago for £219M.  Does anyone in their right mind think that during his reign that Liverpool FC has TRIPLED in value...?  That's just plain nuts.  There is no investor on earth who would believe that.  Heck, even Henry's £300M valuation is saying that Liverpool FC has increased in value 37% since Hicks bought the club.  I understand the Premiership TV broadcasting package has something to do with it, but even that 37% seems ludicrously high.

While there is no investor on earth who would believe that $1B valuation, there is on earth bankers who work for chop-shops who will take any fee.  That's FBR in this case.


For what it's worth, let's see what price-to-sales multiple a $1B valuation represents.
  • Hicks bought the club in a feel good 2007 before any credit crunch @ a 1.8X price-to sales ratio
  • Forbes' ridiculous $822M valuation represents a 2.7X price-to sales ratio
  • To get to $1B, FBR is slapping a 3.3X price-to-sales ratio
So in 2007 Hicks valued LFC @ 1.8X.  Today in the middle of a world-wide recession FBR is suggesting that the multiple almost double to 3.3X.  That's insane.  When the economy gets worse multiples decrease.  They don't double.  Even Hicks himself just decreased the value of his SPAC by 25%.

Anyway, that's why I believe Hicks simply told FBR the value he wanted, they took the fee from him, and then put together an "independent" report & valuation on LFC.

Laughable.  Detestable.  But this is the guy we are dealing with.  He is a pro.  A Hall of Fame All-Star when it comes to litigation.


But the other thing to consider is that Broughton/Henry/RBS all saw this coming a mile away.  They are doing what they need to do.  There's no way they could have stopped Hicks from this course of events.  They are playing a great hand.  They just have to continue to match this crafty incredibly smart and incredibly hungry operator.
« Last Edit: October 14, 2010, 03:54:06 PM by Johnny C »

Offline Dr Abismo

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What a fab post! I hope that kind of analysis is available to Broughton's team. Surely it is. Hicks shoots himself in the foot by quoting Forbes.

Offline dutch_red

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Great post. I'm very bad with numbers and equations but that piece of writing was very well understandable!
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Offline Dr Abismo

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Isn't it the case that all these Forbes valuations etc. are done when a business isn't actually bein gsold, because once it's actually being sold, the market will determine its value. The guesswork is over - we can see what real money is on the table.

I'd guess that the best argument against Hicks's valuations is the actual serious on-time documented bids that came in. No?

Offline gjr1

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Johnny C  you are a fucking star!!!

Thanks for all that.

Don't want to derail the thread but what do you make of all this Mill stuff?

Offline vanoord

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You would generally value a non-football business in one of two ways:

(i) Figure out what annual profit it will deliver, what return you want (usually around 8%) and work it back from there. Thus, a business with a £20m profit valued at an 8% return works out at £250m.

(ii) Add up the value of the assets to arrive at a valuation.

In both cases you can add a bit of 'goodwill' which represents the additional premium you're willing to pay to get the company, which you think you can get back by improving profitability.

It's pretty simple.

If you apply those methods to LFC, you get a figure in the ballpark of £250m - £350m.


The important thing to remember is that something is only worth what someone is willing to pay for it.

Martin Broughton contacted 130 bodies and found nobody willing to pay over £300m for Liverpool FC - so that's what it's worth.

The Forbes valuation is theoretical, the NESV is real.

The club is worth £300m, because that's the maximum that someone is willing to pay for it.
But ye gotta know where ye're just gonna rush in. Ye cannae just rush in anywhere. It looks bad, havin' to rush oout again straight awa'..

Offline Mr Happy Squid

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Great post Jonny. Made a few things clear to me!
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Offline Johnny C

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Don't want to derail the thread but what do you make of all this Mill stuff?
I think he's just muddying the waters to buy himself time.  It's a smart move on his part.

He has now presented 2 different courts in 2 different countries a scenario where 2 different boards have each accepted bids from 2 different buyers.

That sounds like a complete boondoggle to me.  And it sounds like a lick-your-chops money-making opportunity to any attorney/barrister on earth.

Texas Rangers 2.0.
« Last Edit: October 14, 2010, 12:31:44 PM by Johnny C »

Offline gjr1

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Thanks again :)

Just looked up boondoggle :)

Offline StiffieGee

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Thanks for that!  I came across it on a link from the Guardian's blog, so I expect this is getting a lot of visibility.

Offline Manila Vanilla

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Some good articles, Johnny!
They just show how divorced from reality the financial world has become.
Remember, these are people who gave astronomical values to dot-coms months before they went bust.
Their lending to valueless institutions took the world economy to the brink.

There's a difference between shifting numbers around an Excel spreadsheet and understanding the fundamentals of a company.
I've spent a lot of time on the other side of the fence, trying to interest investors in us, and have seen any number of highly scientific finger-in-the-air approaches. They need to learn that it's better to be approximately right than precisely wrong.

Multiples of revenue mean nothing and Hicks was quoted as seeing revenue as a prime indictator (LFC with the revenues of a US football team would supposedly be worth the same).
Multiples of EBITDA have become fashionable when nobody who actually runs a company would use the figure seriously.
In fact multiples of anything historic don't mean much. There is no guarantee they'll happen again.
At best, they're a rough means of comparing similar companies.
Whenever I've questioned a value used as a multiple (as you have) the response has normally been that that's what people tend to pay in this particular industry. No logic, just a self-perpetuating and self-reinforcing stab in the dark.

To say the club is worth £800M because Forbes says so is absurd.
Ultimately, the value of the club is around £300M simply because that's what it seems someone is willing to pay.
I personally think that even someone who pays that much needs his head testing.
No matter how many different multiples you use, these are businesses that have never made a distributable profit and are unlikely to in the foreseeable future.
For that reason, I'm out.

Offline stevemacsteve

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Great post mate and a very worthwhile point. The Guardian have picked up on it also if you didn't know- http://www.guardian.co.uk/football/blog/2010/oct/14/liverpool-fc-sale-live-coverage

Well in.
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Offline myrlas

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Now, THAT is what I call a brilliant piece of writing.

Thanks for the insight.

This should end up on a few journos desks
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Offline No666

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Brilliant post - thanks for that - deserves to spread to The Guardian and beyond.

Offline bleedsred1978

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Jesus Jonny where have you been for the last three years mate.

Great work. Again.
From here on in its all FSG's doing. Good or bad they will stand or fall by the decisions they have made in the summer of 2012. Lets hope they have gotten it right.

Offline mayday

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Thanks for this, really appreciate the effort you went through.

I have clarified my doubts as to Forbes' valuation now. Cheers.
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Offline tdogssc

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Fantastic, thank you much for putting the time into this

Offline Waterloo Phil

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Brilliant Johnny, absolutley brilliant

Offline truedub

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That brilliant mate. It has cheered me up a little bit, cause all this shite has me depressed this last 6 months

Offline General Alonso

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Johnny, your posts are essential reading on this forum!
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Offline Jase

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Takes a lot of reading that mate, had to go through it a few times, but it's superb.
......and could he play!