Rhone Group, Debts and Our Club

Posted: March 15, 2010 by mcdonaldtaf in Business, Finance
Tags: , , , , , , ,

So the first offer is on the table. According to reports, on Saturday morning the Rhone Group tabled an offer of c.£120m for a 40% stake in the club. Valuing the club at £300m; only £200m shy of the current owners’ valuation. The negotiations commence then and Rhone, or any other investors, find themselves in a strong negotiating position (with RBS applying pressure to reduce the club’s debt by at least another £100m). That said, the more investors who show their cards, the more chance that Hicks and Gillett have of seeing the offers rise towards their valuation. Liverpool Football Club is after all a major brand with some significant potential both on and off the pitch.

We need to remember this is only the start of the process. No doubt Rhone will be the first of many names mentioned as potential suitors for taking an equity stake in the club. So I’m not going to get too excited or worried at this juncture. The dreaded two words have already come up though. Rhone Group amongst other things list one of their specialities as ‘leveraged buyouts’. This has sent some fans into a frenzy and they’re already throwing Rhone into the same classification as Hicks and Gillett, perhaps a tad unfairly. Rhone have revealed no details about how they will fund their purchase and it is highly unlikely, in my experience, that they will be able to tie the assets of the club to any initial injection of cash – this would usually only happen if a controlling stake was being taken and then it would no doubt be retrospective.

I’m not saying though that we won’t see our debts increase following this or any other deal. Christian Purslow is already on the record as saying new investment will be a catalyst for acquiring more debts to complete the stadium. You see what Hicks and Gillett need more than anything is someone else to open up the opportunity of borrowing more money. Which is difficult to get in the current economic climate of risk aversion. Rhone Group would certainly, at face value, be able to open up the bank’s coffers again.

So more debts then? Well yes, but I’ve always said that debts aren’t always a bad thing. They allow lots of businesses to grow by creating or expanding revenue streams. The real consideration is the level of debts and the underlying business model. So how much you borrow and your abilities to repay, while sticking to your business model, dictate how risky borrowing that money is. Borrow too much or not generate enough profits to repay the money back and you are in trouble. But benefits can be derived from borrowing; it is far too simplistic (but all too often touted) to say ‘we paid £30m in interest, which striker could we have bought with that.’ Hicks and Gillett borrowed too much while not increasing the revenues in line with the borrowings, hence our current problems. But then look at Arsenal whose debts far surpass ours (more than double) but, through their increased revenues from the new stadium, they can repay their loans, make money (over £40m profits last year) and put out a squad who are competing at the top level. Arsenal got it right (to date), while Hicks and Gillett got it horribly wrong, or, timing conspired against them – take your pick.

Hicks and Gillett believed the debt bubble (which was getting ready to burst in the run up to their acquisition) would be never ending. It wasn’t. Cast your mind back a few years and think about buying a house. You needed £100,000 to buy it so the bank told you ‘don’t worry about the deposit and in fact if you want you can borrow £125,000 – so you can get that new car and a few holidays’. What are they telling you now? ‘£100,000 mmmmmm…. well how about you find £20,000 and we’ll give you the other £80,000 as long as your earnings are good enough’. It’s always been about security with banks, they just relaxed for a few years on the back of a booming property market. A mistake they are unlikely to repeat.

It was no different in the commercial banks. Hicks and Gillett bought the club for £260m and the banks said here you go we’ll now lend you £350m. Happy days until…. pop! Now all of a sudden Hicks and Gillett, with all of their leveraged businesses, are being squeezed everywhere and the demands are flying in to bring their borrowings from the original levels the banks agreed and gave them down to a more realistic and safer level. So the banks won’t lend them anymore money to grow  (as they want security) and money to fund player acquisitions is not forthcoming as we’re too busy bringing down our debt levels.

As security for the banks, in the event of the business failing, (I believe) that personal guarantees are already in place for Hicks and Gillett. They appear to be financially stretched as things stand though, so the banks continue pushing for the debts to be reduced to a safer level. Having realised that should the club fail there would be little point trying to squeeze any additional money from Hicks and Gillett (Blood from a stone etc.) New investors bring new security for the banks. If the club is to continue on its current path, this is the real benefit of any new investor.

Ideally some wealthy individual, with a love for the club, would rush in and buy all of it. But without that individual I’m afraid the debt path is the way to get the club where it needs to be. Rhone may have a track record of leveraged buy outs or using debts to grow companies but they should be judged on how well they manage those debts rather than just worrying about debts because ‘we don’t believe in them’. I’ll remind you again that Rhone have not gone on the record as saying they will borrow money.

At this juncture I don’t know enough about Rhone to comment on whether they are the right people to take us forward safely but I’m not writing them off just yet either. Here’s where the central problem for me is. Whatever happens it’ll be behind closed doors. I’d like to see any new investor come out with the broad strokes of a business plan which shows our solvency, tells us how much they’ll borrow and provides the data as to how that debt can and will be repaid – without impinging on ‘on the pitch’ success. What I’m saying is whoever ends up buying the club (or a large share of it) talk to us, tell us your plans…. not every detail but enough so we can feel confident in the club’s future.

If the Rhone deal looks like a goer I’ll attempt some in-depth research on the company and post it here.

  1. Abin says:

    Nice points and well written. Agree with your views.

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