A Way Forward?

Posted: January 17, 2010 by mcdonaldtaf in Business, Finance
Tags: , , , , ,

Something odd has happened. I have tickets for the Liverpool ‘v’ Tottenham game.  Now don’t start any quips about ‘out of town’ support. It is an ordeal getting tickets for any game, not living anywhere near the Anfield area. The games usually start with a battle against BT and their recorded message or engaged tone. I have, before now, spent hours hitting redial, hangup, redial, hang up. If you do manage to get through you then have to battle through the queue. Spending hours on the redial button to be told you’re number fifty zillion in a queue is quite dis-heartening. In fact despite taking so long winning the first battle, if I am a stupidly high number I have been known to hang up. Every time I have started with a high number, after waiting about half an hour (being charged), the line goes dead!

So imagine my surprise when I got through first time, swiftly followed by the little boy on Christmas morning routine when I heard I was number one in the queue. Not to get too graphic but it was a Scarlett Johansson, Angelina Jolie and me moment when I then booked four tickets seated together before hanging up jubilantly.  But as the euphoria started to pass I began to worry. How did I just get four tickets for a category A game so easily? To put it into some sort of context I have lost a whole afternoon before now, trying to get tickets for a game against Wigan!

Now it’s fair to say that the game is on telly and is a re-arranged fixture. But still… four tickets seated together, non restricted views booked within 5 minutes, How could this be? Is the recent poor form and turmoil off the pitch now threatening to impact the club from a financial perspective?

If we are to start seeing lower gate receipts then the pressure on Rafa, to deal with his side of things, will increase ten fold. The club simply cannot start to lose any of its revenue sources. Especially while champions league football next season is nowhere near a certainty and the club works so hard to raise additional commercial revenues. But what about pressure on the owners and what is the solution to the off pitch turmoil? Well new owners, according to many, would be a good start.

But then you open up the key question. Who should take over the club? Every option from fan ownership to a full flotation has its pros and cons together with varying levels of risk. I wouldn’t want the club to end up reliant on one person and I would be concerned about fan ownership. I can see the merits of the club becoming a PLC, but it has been rightly pointed out that we could come back full circle into private ownership.

Consider the best strategies for the business. We desperately need a new stadium and additions to the playing squad. Whether the levels of re-building being suggested is because of our current run is still to be seen. Although, the increased competitiveness within the Premiership places a significant risk to the future success of the club, which could see itself in free fall without squad investment. But fans don’t want debts. Even if we only had debts for the new stadium interest payments will always be associated with ‘who we could have bought had we not had to pay them’. A simplistic view, but one which is used all too often.

So. No debts, a new stadium, investment in the squad and not reliant on a sugar daddy owner. Starts to look impossible doesn’t it? As suggested in the Telegraph this morning you’d need about £1bn to do that. The opportunity to make a return on investment at that price would be very slight and thus a high risk which most investors would run away from; especially when other clubs could be bough for a fraction of that. Then someone mentioned the idea of a consortium coming in, led by an ex-player, to buy the club. I’m unsure if this rumour has any merit but it did get the grey cells working. So let me propose what I think of as the ‘dream scenario’. It is possibly not likely or able to happen as I present it but, if only…

First off a consortium purchase by investors who are looking for a long-term investment (10 years) would be an ideal proposition. Part of that consortium could well be Share Liverpool, especially given the levels of investment required. The end game being getting Liverpool to a valuation of £1bn and paying regular dividends to shareholders in the interim. But key to this is the long-term commitment to what is, after all, a national treasure.

Hicks and Gillett would be looking for at least £100m to walk away from the club, so add-on the debts and you are looking at £350m simply to buy the club. Then there’s the stadium for which you are looking at another £400m to build. So we’re up to £750m already. So ideally we are looking for an initial investment package of £750m from the consortium. Smaller investors dealing through Share Liverpool and then larger investors putting in £50 – £150m each. This would allow for a return in total of £250m (plus dividends) should the club reach its £1bn valuation.

On the plus side, without debts and a larger stadium it is not beyond the realms of possibility for the club to be making a profit of over £50m per season. Now I know some will say ‘great £50m a year for players’ but for one, £50m may not be enough and secondly the investors need a return and therefore at least half of the profit should be returned in dividends (considerably less than the interest on debts).

So, where does the money for players come from? Well there is the £25m per year left in profits but this would no doubt be needed for additional wages. Let’s also consider that we’re not talking about chicken feed here, at squad re-building time we’d need £100m at least. I’d been milling around the idea of whether fans could invest in players for a while and then an idea hit me. Please note that I’ve not thoroughly researched this and I’m not a financier – so it’s an idea and not a finished recommendation (at this stage).

Taking my own idea and mixing with someone else’s (hut hum) I then started thinking about ‘player bonds’ as a way to raise money for player purchases, providing an additional way for corporations and fans to invest in the club. Rafa has shown incredibly well how profits can be generated from a player’s development and then disposal. This would form a central profit centre in any other business but is under-utilised in most football clubs.

The clear benefits to the club being that interest would accrue in the accounts but not be paid until the bond matures, or, the player being sold or reaching the end of his contract. The club would have to pay a fixed rate for the bond (less than interest) and also a percentage of any profit made on player disposals. So for example take someone who buys £1m of bonds, and the cash raised for those bonds are used for the purchase of Alonso at £12m. When the player is sold for £30m the bond investor receives their fixed interest plus a percentage of the profit. If you say the profit percentage is 10% then a handsome return can be made. If no profit or a loss is made, well they still get a fixed rate return. Imagine the return someone is going to make on Torres!

If set up and  managed correctly this could see a stream of investment money incoming for purchases on a continual basis. Payments out only required when the asset is sold, at a time when the club would get the cash in and therefore only have to ‘make up’ any shortfall for the bond’s interest (possibly from the hefty profits being made). There would however have to be controlling measures put in place. For example in this scenario it would not be unreasonable to ensure a player doesn’t go past their one / two year contract renewal stage. This in some ways could well help the club apply pressure to players for reasons ‘out of their control’.

The right manager would also be critical, I never remember Houllier making a profit on player sales like Benitez does. We would also have to accept that player turnover would be part of our footballing model. Only the truly gifted being kept in spite of possible profits.

It could be relatively easy to start this off by selling the player bonds on key players we have now (Gerrard [£25m], Torres [£35m], Mascherano [£20m] and Reina [£10m]). Yes I realise they are worth more than that, but there has to be an incentive for people to buy the player bonds. This raises £90m for player purchases, who (once bought) you then offer bonds for and so on. So the squad investment starts to continually fund itself offering a significant return for investors and allowing the club to buy more players, without incurring hefty interest payments. Of course this is all subject to having a good track record of making money on player sales. Consider the value of our squad now though had Rafa managed to buy Silva and Villa for £25m a piece. Under his guidance I’m confident they’d now be worth double and the club would have lifted the title last season.

So subject to there being a hunger for both initial long term investment (dividends and longer term increased value to £1bn) and bond purchases (dependant on player profit success), which I accept there may not be (probably the main problem), I think I did it. No banks debts, continual squad funding and everyone working together for one goal. Or did I just get it horribly wrong? Please leave a comment where you see the loopholes (the first stage of research). Like I say it’s an idea but no more without further research.

Note: I will reiterate that this is really just an idea and I am writing my thoughts as they come to my head. I have not fully considered how this could go wrong and would need some time to model the proposition first. It is certainly an idea that I think worthy of further research and possibly represents an entirely new model for football clubs to consider. God knows the debts model isn’t working!

  1. guest1892 says:

    dude, the day Liverpool become a selling club, will be the day I feel so dettached from it.

    The loophole in that system is that to achieve a maximum revenue (sick), you need to sell the player at the height of his career. And that means Liverpool will loose one of its best players.And that means it will weakening the team.

    Eventhough the money will be used to buy another quality player, that doesn’t mean the new player can easily adapt.(Wouldn’t you rather still have alonso than take a gamble on Aquilani?)

    A team needs a stable environment to achive something. You can’t have that through selling and buying players.

    And you must also consider the players feeling. Would they really give all their best if they know that at somepoint they will be sold? (To make profit). A player is a human being. Not some asset

    Anyhow, won’t you feel pride rush through your blood seeing a player be a great servant for YEARS?

    The only reasonable answer I can think of is through youth development. The reserves must be good enough to fill in the squad, so that all money will be used for first team player.

    • mcdonaldtaf says:

      Yes, I see where you’re coming from.It is indeed sad that football has come to this. Unfortunately it is also the realistic position we find ourselves in. Unless there is a major overhaul on transfer regulations, capping what a club can spend, then we’ll need to spend to compete.

      Youth development is all well and good but will deliver unknown (but possibly world class) results. Where we are ending up sadly is in an impossible position with diametrically opposed wishes. No debts, new stadium, new players, success, financially stable, traditional, community driven, profitable. I’m afraid football clubs are businesses and there is an adjustment taking place, which is actually the subject of a dissertation I’m writing.

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