Topic: A Leverage Buy Out, How LFC has fallen victim to a cruel financial instrument

[Paul Gardner]

Just been sent this.

A Leverage Buy Out, How Liverpool FC has fallen victim to a cruel financial instrument

The term Leverage Buy Out was not really synonymous with a football fans dictionary until 2005 when two American businessmen strode into Manchester United amid fractious opposition from the club’s supporters. They disagreed wholeheartedly about The Glazer families plan to leverage the club up to its eyeballs in debt, so that their purchase was bought and paid for by the club. It was a similar story down the road at Liverpool, when Tom Hicks and George Gillett swept into Liverpool amid a slick trail blaze of slick PR. “This will not be a takeover like Manchester United”, Hicks procured nonchalantly, meanwhile his business partner, George Gillett, proclaimed that “there would be a spade in the ground within 60 days” for the new stadium. Shortly after their arrival things began to take a turn for the worse, when suddenly their slick spiel suddenly seemed more hollow than an Easter egg, after it was announced that their takeover had, in fact, incorporated large amounts of debt onto the club. To date there is still no sign of the new stadium that was promised by them, and which the club so desperately needs in order to compete with its rivals.

In typical terms, LBO’s usually operate in the following ways. A buyer purchases an organisation with money that is borrowed from the banks. These borrowings are then loaded onto the holding company, which usually have only one asset, the business itself. The organisation then becomes responsible for the servicing and liability of the debt, with the buyer usually throwing down some of their own personal guarantees just in case things go wrong. The period after the purchase usually coincides with a period of intense structural change within the organisation, as operating expenses within the company are drastically reduced, usually in the form of job losses and various other cutbacks. On the whole scale of things it is useful to think of this as an illusion, as the reduction in operating expenses transpires into higher profitability. This achieves two purposes. Firstly, it allows the organisation to meet its obligations more easily, and secondly, it allows the business to showcase its apparent exceptional performance to the market place, making it ripe for any takeover.

However, behind the illusion lies a different story, not one of exceptional performance, but one of severe structural difficulties. Any organisation needs to be aware of its competitors and therefore manage the company accordingly. By reducing operating expenses investment for the future is limited, as anything other than the necessary operating procedures are shelved, which often results in a firm being unable to maintain its competitiveness in the marketplace. For example, it maybe that the advertising department is downsized, investment in new technology and research and development curbed, resulting in an out of date product base, and an uncompetitive pricing model compared to other competitors. The company then begins to lose its market share as the illusion of profitability, and meeting its financial liabilities take precedent over the long term viability of the company. This means that when that when an organisation is sold, it is often left with problems, flooded with debt and facing severe structural and cultural difficulties. Should the debt be paid off in any future sale, the intangible damage to the brand may already have been done, due to a lack of investment, which decreases its competitiveness within an ever changing market place.

How does all this add up in the case of Liverpool FC then? In football, LBO’s are difficult pull off because of the competitive forces that operate within the football industry. It is quite difficult to rationalise a football club due to the tight relationship between revenue and success. What, it seems, Tom Hicks and George Gillette wanted to do was create the illusion that the LFC had a bright and prosperous future by setting the wheels in motion for a new 65,000 seater stadium on nearby Stanley Park, that would have allowed them to move the club on to the next bidder sometime during the construction process for treble what they had paid for it, while at the same time allowing the money loaned for the purchase to be paid back to the bank. The short term nature of the loans that they secured seems to add credence to this theory. While all of this was going on, some investment was made in the squad to keep things ticking over as during the summer of 2007 Fernando Torres, Ryan Babel and Yossi Benayoun were all purchased, albeit with the help of a working capital facility of 105m that was provided alongside the 245m purchase facility provided by RBS to the club. However, the plan went to the wall when funding could not be secured for the new stadium due to the global financial crisis, and later LFC’s exposure to debt. The bank began to worry that this was more junk debt, and began to become increasingly concerned about the ability of the club to meet its obligations, given the amount of money that Hicks and Gillette have had to plough in via off shore companies in the Cayman Islands just to keep the club solvent. This money has been used to absorb the losses of 42m and 54m that the club has posted in both sets of accounts released since the arrival of the Americans in 2007, as well as some equity that they have put in themselves to pay for the 45m repayment that RBS demanded last summer, as a stipulation of the refinancing package that was secured from the bank last summer. 

Last summer RBS wanted 45m paid back, this summer it was 100m, and now the deadline appears to be March 2011 with the full amount having to be paid back by then. Hicks and Gillette are now haemorrhaging money into the club, with the last account showing a total of 144m ploughed into the club by the owners, and the holding company posting losses of 54m. With no more money to call on from the working capital facility, and the owners unwilling to put any more money in themselves, there is no new money to buy players, and subsequently competitiveness has been lost causing the club to miss out the lucrative revenue from Champions League place. The club is now stuck in a negative cycle of growth, with doubts surrounding whether any sale price will allow the club to meet its liabilities to the banks and to Cayman. Even then there are fears that the Cayman money will be an outstanding liability on the books of the club. This is a real possibility given that the loans have not been converted to a share issue, which would suggest that they will not be taken care of in any subsequent sale, and that any new owner will be left to service the debt with crippling interest rates, unless any new owner pays it off in full. This remains hard to envisage given that any buyer would then have to stump up somewhere in the region of 400m+ to buy the club, plus the money required to take the club out its negative cycle of growth by purchasing players. However, even this is complicated due UEFA’s new financial fair play initiative which limits benefactor investment in players to 38m over a three year period from season 2012-13. Given the competitive advantage that Manchester City and Tottenham currently have over the club, together with the absence from the lucrative Champions League, plus the superfluous amount of money needed to propel the club back into a competitive, not to mention stadium funding, it is hard to envisage any bids of 400m for the club forthcoming. Given the situation, if the club cannot raise the money to pay its crippling gross debt back which stands at 395m, then there are genuine fears that officials will seek to raise money by cashing in on the club’s saleable assets. It is horrible writing this, and it’s horrible for any you reading it, because this isn’t what football should be about. Involvement in a football club should be a leisure pursuit, not an academic activity where the fans study financial scenarios of the club. Football has lost its soul, and clubs with decades of rich history and age-old tradition are being destroyed by the money men. In an era of aloofness, fans are treated with utter contempt by the officials that run these institutions, of which carry such an intense emotional attachment for the supporters who pay money each week to support their team. Everything in modern football is buttressed from the fans, with directors concealing from information that they wish to know regarding the club, and they are often kept in the dark over any changes that impact upon them, despite the rhetoric “We'll never take our fans for granted” that is usually wheeled out during times of difficulty. Supporters are just expected to keep on oiling the club's coffers, while officials remain distant, with fans considered a nuisance and a hindrance when they have the audacity to ask for an honest and open appraisal of the club’s health.

This week Spirit of Shankly released a set of questions that they want answers to regarding the financial health at the club and the role of the newly appointed managing director, Christian Purslow. There is currently a theory circulating that Mr Purslow’s appointment last year has more to it than meets the eye. He was appointed to the board in order to source investment for the 100m that the banks wanted paying back this summer. That deadline has now passed and has been extended until March 2011, with the full loan facility now due for repayment on this date. However, Purslow’s arrival on the scene is more than a little bit bewildering given that he has no previous experience in football, and suddenly he is running football affairs, sacking managers and buying and selling players, despite his previous professional background being based around finance and in particular the management of hedge funds.  However, his arrival on the scene might have something to do with a company called Mid Ocean Partners, a private equity firm, of which Christian Purslow was a founding partner. The firm has recently expanded its investment platforms to include an offshoot firm that invests in bank loans and bonds called MidOcean credit partners, and a company called KSA MidOcean which is a hedge fund. It is feasible that Mr Purslows arrival at the club is connected to MidOcean, and the possibility that the firm played a key role in the refinancing that took place last summer and March this year, by investing in the bank loan that RBS lent to the club. This would certainly explain his arrival to the board. What happens next is anyone’s guess, and there are a number of potential scenarios. One of these include refinancing the RBS loan with hedge funds with high interest rates should no suitable buyer be found, and another being selling off some players in order to pay down some of the debt, so that the club can be acquired for cheaper price. This could act as back way in for Purslow’s company Mid Ocean to invest officially in the club, maybe through a hedge fund via one of their offshoot investment platforms. According to the MidOcean website they are a company that “identifies opportunities in sectors chosen based upon macro and micro trends”. In order to recoup the debts by selling the club’s key assets they could potentially acquire the club for a much lower price through, firstly, a reduction in overall level of debt, and secondly, through the declining market value of the club due to its poor competitiveness as a consequence of selling key assets. This would also fit nicely into MidOcean’s investment strategy of acquiring businesses based upon their macro and micro trends, with competitiveness being a micro trend.

Liverpool FC does not exist as a football club anymore; it’s a financial minefield which is being negotiated by city institutions and ruthless businessmen, with the supporters being kept in the dark over the precarious situation. It is about time that the fans are informed with regard the health of the club. This should be done face to face with whole hearted honesty, rather under the auspices of the club in a controlled environment, which attempts to put more spin on things than David Cameron at one of his political rallies. Supporters shouldn’t just be tasked with ploughing money into the club, they deserve more than this, transparency being the very least. However, to conclude, we must ask a more pertinent question regarding leverage buy outs, why are they openly accepted despite the fact that they completely contradict the business model of the Premier League. The league claims "At the heart of the Premier League’s sporting and business model is an investment virtuous circle-the quality of matches leading to popularity, leading to high income, leading to further investment and thus further improvement in the quality of football, of the stadia, and of talent development". It’s galling that given the principles of the league that LBO’s are allowed as a consequence of its ownership neutral model. It’s a paradox of the Premier League that its success has attracted LBO artists, yet the presence of the LBO model may ultimately be the death of two of the teams, Liverpool and Manchester United, of whom bring the league so much commercial success in the first place.

[SMD]

But we signed Joe Cole.

[RedJam70]

Nice read. Where's it from?

Edit; well I say nice but ...well you know what I mean...

[Walk on, walk on]

But we signed Joe Cole.

And Danny Wilson.

And Jovanovic.

Oh glorious days, 1st place and Europa Cup here we come 

[mccred]

Excellent post, needed to read that to put things back into focus. Been slowly getting drawn into the feel good factor of a couple of signings and a senior player pledging to stay.
This time next year, we'll be twice as fucked if these c*nts are still in charge but peoples eyes are being taken off the bigger picture.
I fucking despise the c*nts for ruining my enjoyment of being a Liverpool F.C. supporter. Wish the parasites nothing but ill health and slow deaths.

[TepidT2O]

That has scared the living fuck out of me and no mistake.

The stuff about midocean buying the club through a hedge fund is frankly a horrific thought.

[Paul Gardner]

Nice read. Where's it from?

Edit; well I say nice but ...well you know what I mean...

Sent it from a mate. Don't know where it originally came from.

[Sajets]

Wish the parasites nothing but ill health and slow deaths.

[TepidT2O]

Was the bid for 40% of the club in March fronted on behalf of mid-ocean?
Maybe Purslow was trying to gain a stake in the club.

It is obvious that there is such a mire of debt and complex financial double dealings that we may be saddled with it for 20years.

[scatman]

die hicks, ecil, gilett...please?

[whelan05]

Excellent post, needed to read that to put things back into focus. Been slowly getting drawn into the feel good factor of a couple of signings and a senior player pledging to stay.
This time next year, we'll be twice as fucked if these c*nts are still in charge but peoples eyes are being taken off the bigger picture.
I fucking despise the c*nts for ruining my enjoyment of being a Liverpool F.C. supporter. Wish the parasites nothing but ill health and slow deaths.

I actually wish them a quick death, they would be gone from the club quicker that way.........

[The Flying Pig]

Purslow and MidOcean?

Even worse than what we have now and at a higher rate of interest!

[manifest]

"However, to conclude, we must ask a more pertinent question regarding leverage buy outs, why are they openly accepted despite the fact that they completely contradict the business model of the Premier League."

I think an even more pertinent question is why we tolerate ANY LBO, since the effect on humanity is pretty much always the same, whatever field of business is involved. Nice anonymous piece.....interesting take on purslow/mid-ocean that there might be a long game going on.

[Paddock77]

Paul thanks for posting that. Very worrying times ahead. Is any one doing any digging on the MidOcean bits in that post?

[Dr. Beaker]

Great/depressing post Paul, if you know what I mean.

The PL could put a stop to this (happening again) tomorrow. They are either run by short-sighted incompetents or they also are on the make.

Personally I think they are on the make. Not in an 'against the law' type of way of course, but by being aware that the goose that lays the golden egg is surely being slaughtered - albeit slowly and silently. The individuals involved at the PL must know this is happening but they are making so much dosh that they are (personally) safe anyway, even if it happens today - just like the bank job that was recently foisted on the world's population.

The whole house of cards will, once again, come tumbling down and all the money will, once again, have disappeared. It's funny how money just disappears like that isn't it.

I actually think that football can only be rescued after the above nightmare scenario has played itself out - though the guilty would have to be hunted down to the ends of the earth, which is of course exactly where they will be.

[west_london_red]

Is there any evidence that MidOcean Partners are interested in buying the club? Anything at all other any an annonymous article?

Or are we all doing 2+2 and not coming up with 4?

[Chaztastic]

Is there any evidence that MidOcean Partners are interested in buying the club? Anything at all other any an annonymous article?

Or are we all doing 2+2 and not coming up with 4?

That was one of the conclusions I came to reading that article. The other is a stark reminder (as if we needed it) of who would want to buy the club and what would their motivation be for doing so? I can see no positive outcome for the health of the club either way.

[DonkeyWan]

The potential scenarios seem unlikely (Purslow trying to cheapen the club to buy it out right) since it would still represent a poor investment at a lower price.

However, the discussion on debt and how the club can curtail it is pretty much spot on and does seem to indicate that major asset sales will be going ahead. So far this summer Purslow has raised 20-25 million in player sales (and goodness knows how much through wage savings), with the potential for another £25 million with the impending sale of Mascherano. In other words he will be half ways there. In one sense the sales have been fairly astute, a lot of fringe elements and those who have expressed a desire to leave for a while now.

If the summer ended with those sales alone it would probably stop outright rebellion by the fans and leave the team on the pitch in a shaky but not impossible position. However, Purslow needs to raise £100 million and the only way to make the £50 million short fall up will be via Torres. We all suspect he will be sold and the likelihood is, after a suitable amount of time after Javier is sold, Torres will follow him.

But of course the problems will remain. £100 million will hardly dent the overall level of debt.

[No666]

Is there any evidence that MidOcean Partners are interested in buying the club? Anything at all other any an annonymous article?

Or are we all doing 2+2 and not coming up with 4?

I asked this on the main board: is it not against CP's fiduciary duty to be involved in such a scenario, and if he were could he not be sued for fraud or whatever?
As someone who's been actively involved in the campaign against the owners for bloody years now, it seems to me that we weaken our case by engaging in speculation that could be easily refuted (if it is untrue) and we should therefore be careful to get our facts right, particularly at the moment when there's a backlash against the campaign in tandem with feel-good pr engendered by the club. We should also source that article to see if someone credible is writing it.

[royhendo]

It's a fair point that mate, but it's equally fair to say the writer doesn't hide that it's speculation. He talks about a theory and continues in that vein.

[No666]

But if it is against CP's fiduciary duty then the writer should make that clear, because it makes it considerably less likely. It's bad journalism and just because we like the tone, we should still question it. I fear it will become gospel and spark a new bout of emails/letter writing that if easily disproved will provoke more sneering criticism of SoS etc. Well, you know where I'm coming from.

[MichaelA]

Paul - could you provide us with a source or an author for this piece?

[Stussy]

Its a downright and dirty trick.

Horrible bastards.

And fuck Scudamore and the Premier League for not caring and outlawing this method of ownership financing.

Fuck them all.

[Paul Gardner]

But if it is against CP's fiduciary duty then the writer should make that clear, because it makes it considerably less likely. It's bad journalism and just because we like the tone, we should still question it. I fear it will become gospel and spark a new bout of emails/letter writing that if easily disproved will provoke more sneering criticism of SoS etc. Well, you know where I'm coming from.

Who said SOS were using it as fact. Read Royhendo's post above. That pretty much sums it up.

[Paul Gardner]

Paul - could you provide us with a source or an author for this piece?

See my post earlier in this thread.

[Zeb]

I asked this on the main board: is it not against CP's fiduciary duty to be involved in such a scenario, and if he were could he not be sued for fraud or whatever?
As someone who's been actively involved in the campaign against the owners for bloody years now, it seems to me that we weaken our case by engaging in speculation that could be easily refuted (if it is untrue) and we should therefore be careful to get our facts right, particularly at the moment when there's a backlash against the campaign in tandem with feel-good pr engendered by the club. We should also source that article to see if someone credible is writing it.

Yes and yes. It's not coming from SoS but the speculation over MidOcean may not be helpful, unless it has a basis in some kind of fact beyond Purslow's business links.

Just wrote a post in the 'Join the Union' thread about pretty much this.

Key questions which need answering are really:

1) What links does Liverpool FC, via Kop Delaware, have with other businesses and holding companies of Tom Hicks and George Gillett?

2) Are the current board of directors currently acting as they are because of their legal duties to protect the interests of creditors?

3) What is the timeframe in which any potential sale of the club must happen before the board must act to ensure that club will not have to enter administration?

4) Are the board determined to ensure the long term viability of the club by refusing any future attempts to buy it on the LBO model and to ensure that the existing ownership is locked out of retaining control of the club via the models we've seen demonstrated at Chelsea and Leeds and Chester?

5) At what stage would the club have to recognise that the 'New Anfield' project as it exists currently needs to be written off?

6) Are the board sure that we have received value for money on this project after their study of the costs?

[No666]

Who said SOS were using it as fact. Read Royhendo's post above. That pretty much sums it up.

No one, including me. But by posting it you open yourself up to your critics having a go if it proves wrong.

thanks, Zeb. Those questions - could you table them to CP for this LFC tv interview?

[Paul Gardner]

No one, including me. But by posting it you open yourself up to your critics having a go if it proves wrong.

thanks, Zeb. Those questions - could you table them to CP for this LFC tv interview?

I never said it was fact. It says it is a theory. A theory which can spark some more questions that have to be answered. No assumptions made, just further things like Zeb has posted above that we need answers for.

[DonkeyWan]

I never said it was fact. It says it is a theory. A theory which can spark some more questions that have to be answered. No assumptions made, just further things like Zeb has posted above that we need answers for.

I think the point most posters are making is that be engaging in 'what-ifs' that appear highly unlikely it undermines the excellence of the rest of the piece.

[Zeb]

Those questions - could you table them to CP for this LFC tv interview?

Have just done, and have said that I'd welcome his answers if he wishes to contact me personally. Really can't see those questions being asked. But LFC.tv pleasantly surprised me with their Broughton questions so worth a punt.

[Redmen22]

Very infomative piece this Paul....helps to see the bigger picture.

[oojason]

as other posters in other threads have said - there should indeed be legislative protection for football clubs - as they represent their local communities.

LBO's of community based projects should be made illegal - sadly, like many things in government, the law only catches up after the damage has already been done.

How the Premier League, the FA, UEFA, FIFA and the UK Government can keep a straight face and try to project a 'fair play', community or social image of the game is beyond me when they won't even tackle the ownership issues of the clubs themselves.

[xavidub]

Just when you thought it couldn't get any worse...

[redmen77]

I asked this on the main board: is it not against CP's fiduciary duty to be involved in such a scenario, and if he were could he not be sued for fraud or whatever?
As someone who's been actively involved in the campaign against the owners for bloody years now, it seems to me that we weaken our case by engaging in speculation that could be easily refuted (if it is untrue) and we should therefore be careful to get our facts right, particularly at the moment when there's a backlash against the campaign in tandem with feel-good pr engendered by the club. We should also source that article to see if someone credible is writing it.

I don't see how it is against his fiduciary duties as management buyouts occur all the time. He could of course be accussed of failing his duties if he was found to be reducing the value of the business to make it more affordable but that would be difficult to prove even if he sold the entire first team to clear outstanding debts.

[Paul Gardner]

as other posters in other threads have said - there should indeed be legislative protection for football clubs - as they represent their local communities.

LBO's of community based projects should be made illegal - sadly, like many things in government, the law only catches up after the damage has already been done.

How the Premier League, the FA, UEFA, FIFA and the UK Government can keep a straight face and try to project a 'fair play', community or social image of the game is beyond me when they won't even tackle the ownership issues of the clubs themselves.

They hide behind UK company law by saying they cannot stop such things, but in Spain now they are working on a dedicated Sports Law so it is possible to make the changes required.

[No666]

So if Spain got one up and running we could point this out to that chinless upper-class twit who now seems to be sports minister and challenge him about his will to do the same, I take it.

[planet-terror]

Excellent reading,,,,,now my siggy,,,,spread the word

[planet-terror]

My daughter is 2 ,IM going to ensure she has some kind of business education because the loops and trick are quite mind boggling and how the govts allow such things are amazing,,,
Got a few questions on the post ill ask when ive got a bit more time,,

thanks for posting

[Paul Gardner]

So if Spain got one up and running we could point this out to that chinless upper-class twit who now seems to be sports minister and challenge him about his will to do the same, I take it.

Would hope so.

"We will encourage the reform of football governance rules to support the co-operative ownership of football clubs by supporters."

The Coalition Programme for Government.

http://www.general-election-2010.co.uk/2010-general-election-manifestos/election-2010-coalition-government-programme.pdf

[Lush is the best medicine...]

Is there any evidence that MidOcean Partners are interested in buying the club? Anything at all other any an annonymous article?

Or are we all doing 2+2 and not coming up with 4?

imo the article is pure fantasy - dont hedge funds want ridiculously high rates of return on investments?