The Liverpool Word are delighted to bring on board Nazareth da Gama, an investment banker who lives in Italy, to further unravel exactly what the latest set of financial reports from Liverpool Football Club imply for the present, and the future, of the team. You can follow Naz on Twitter here.
The purpose of this article is to explain Liverpool FC's 11/12 accounts and try to analyse the numbers, rather than preview them, in light of widely circulated information pertaining to the club and its players. I also intend to show where there is "gap" between the numbers and the information. Finally, I will attempt to provide the readers with some tools to help them better understand the club from operational perspective and assist them in building a more accurate forecast of the club's results in the future.
For the second year in a row, Liverpool ranked ninth in Deloitte's latest Football Money League table. The table, which is published in January, ranks the world's top 20 teams in terms of annual cash flow. Liverpool placed fifth among Premier League teams, behind Manchester United (£320.3 M), Chelsea (£261M), Arsenal (£234.9M), and last season's league champions, Manchester City (£231.1M). Liverpool is the only team on the Top 10 List that is not part of the Champions League, which makes its ranking quite impressive.
The cut-off date for accounts changed from 31 July to 31 May so that club revenues could be better aligned with the accounting period in question. This will specifically render a better reading of match day and TV/broadcasting income. The change also ensures that the trading of players during the summer and January windows is fully reflected in the accounts. Finally, the owners and fans alike can easily recall a certain football season in terms of which players were acquired or sold, what the team's league position was (i.e.,on pitch performance), and what its financial results were (i.e., off the pitch performance) .
Liverpool's 2011-12 results indicate that match day income rose by £1.4M to £42.3M. This is a reflection of Kenny Dalglish's foray into the Carling Cup and the FA Cup finals last season, as well as an increase in season ticket revenues. Although Liverpool played three fewer home matches in 2011-12 than it did in 2010-11 (24 as opposed to 27), average home league match attendances rose by three percent, and average revenue per match increased from £1.5m to £1.9m .
By contrast, media income declined by £2.6M (3.9 percent) over the 2011-12 season. This was primarily due to a lack of European competition and the resulting UEFA central distributions; however, media income did receive some increases due to Liverpool's appearances in domestic cups. Liverpool's eighth-place league finish also resulted in reduced Premier League distributions of £54.4m, compared with £55.2m from the previous year.
Commercial income declined by £13.5M to £63.9M due to the shortening of the accounting period by two months. In a recent interview, Ian Ayre confirmed that net revenue rose by £5M from last year to approximately £188.7M. Deloitte's Football Money League 2011-12 shows a different breakdown of revenue for the full 12-month period than the LFC's Directors' report does. However, both have the same revenue total.
For the equivalent 12-month period, the club's unaudited turnover has increased by £5million and we were delighted to further strengthen our portfolio of commercial partnerships as we continued to focus on growing successfully at home and internationally.
Liverpool's dependence on its rising commercial income continued to increase. Its revenue composition resembles that of Top 4 clubs Real Madrid, Barcelona, Manchester United, and Bayern Munich in that most of its income is derived from commercial, followed by media income and then match day.
The Warrior £25M kit deal went into effect on 1 June 2012. LFC should see another £13M increase in revenue in its 2012-13 figures. LFC continued to focus on the commercial aspect of the business after the accounting period. It signed a three-year deal with Garuda Indonesia, the national flag carrier of Indonesia. In addition, it signed a four-year sponsorship deal with Chevrolet and a partnership deal with a Turkish betting company, Misli.com. LFC also signed two-year deals with both Paddy Power and 188BET. I expect those combined deals to continue to bring about improvement in commercial income to the tune of £15M.
LFC played 5 PL home games during the 2011-12 season, one as part of the Carling Cup and four as part of the FA Cup. It played only one home game in domestic cup competitions in 2012-13. However, LFC played six Europa League games at home this season (including two in the qualifying rounds against Gomel and Hearts) to partially offset the drop in domestic cup home appearances. Assuming a conservative lower match day revenue of £1.7M per home match ('11-'12: £1.9M), I expect a decline of up to £1M in this category.
In 2011-12, each PL team got a £13.8M share of domestic TV income, plus a £18.76M share of foreign TV income. Each place in the table was also worth £755K in prize money, otherwise known as merit payment. So, for example, if LFC finishes sixth in PL this season, the club can expect to receive (20-6+1) * 755K= £11.32M in merit payment (as opposed to £9.8M in 2011-12). In addition, clubs receive facility fees of around £485-500K per live TV match in the UK. This payment depends on how many times a club is featured in live matches; this number ranges from 10 to 26. LFC's revenue from facility fees was about £12M in 2011-12. Net expected increase in LFC revenue is £1.5M in 2012-13, thanks to a "hopeful" higher league position finish.
Based on distributions after the '11-'12 season, Europa League teams received €90,000 for each qualifying round,€1M for participating in group stages, and performance bonuses of €140,000 per win and €70,000 per draw for each club in the group stage .Each participant in the round of 32 received an additional €200,000. For LFC, these numbers add up to €1.94M.
There is also television market revenue to be doled out according to a number of factors, including the proportional value of an individual club's national TV market. In the past, these payments ranged from €4M to LFC and Man City (2010-11 Europa League) to €1.4M to Spurs and Birmingham (2011-12 Europa League). Thus, if '11-'12 distributions are repeated in '12-'13, Liverpool can expect to receive anywhere from €3.34M to €5.94M.
By default, exceptional items are those that are material because of their size or nature. They are also infrequent ("non-recurring").
Liverpool paid £9.8M to Kenny Dalglish, his team and Damien Comolli .The club continued its trend in the last few years : £8.39M to Hodgson and Co. and Christian Purslow in 2011; £7.78M to Benitez and Co. in 2010; and £4.3M to Rick Parry and Co. in 2009 – a package which Parry described as "perfectly fair" in February of that year.
The total is £30.3M in addition to the £5.5M reportedly paid as a compensation package to Swansea for Brendan Rodgers and his backroom staff, first-team coach Colin Pascoe, match analyst Chris Davies, and conditioning expert Glen Driscoll. Theoretically, LFC can have a case for arguing for the capitalization of this £5.5M expense and spreading it over the contract period of Brendan Rodger's and his staff.
In June 2008, the Premier League agreed that from the 2009-10 season onward each club would publish, on 30 November of every year, the total amount it paid to authorised agents between 1 October of the previous year and 30 September of the current year.
Over the last three seasons, Liverpool has spent a total of £24.6M on agents' fees. This includes £8.6M for the period between 1 October 2011 and 30 September 2012 . LFC paid £7M and £9M for the previous reporting periods. This is quite surprising considering that LFC only signed two senior players during that period: Fabio Borini and Joe Allen. These players were acquired for a combined fee of approximately £27M, while Nuri Sahin joined on loan. There is the remote possibility that some of those agents' fees were paid late for earlier transfers.
Between 1/8/2011 and 31/5/2012, Liverpool signed Sebastian Coates and Jose Enrique for a combined total of around £13M. The club also signed around six junior players, most notably Joao Teixeira (£850K), Jordan Ibe (£500K), Pelosi, and Danny Ward. However, LFC's books list the total costs for all of those players as £18.9M. These academy/reserves players are very unlikely to have cost £4.5M. Perhaps agents' fees can account for the difference.
During the financial period, Liverpool reportedly sold/released the following players: Daniel Ayala (£800K), Milan Jovanović , Nabil El Zhar, Sotirios Kyrgiakos, Emiliano Insúa, Christian Poulsen, David N'Gog (£4M), Philipp Degen, Raul Meireles(£12M) in addition to two junior players. The aforementioned players cost in the book of the club was £25.8M and their net book value was £14.4M after amortizing their acquisition fees. LFC made a loss of £1.7M on the sale of those players.
Given that the club collected a reported £16.8 M from the sale of Ayala, Meireles and N'Gog and given a book value of £14.4M – this suggest that LFC incurred around £4.1M in "direct costs of sale", these are typically contract termination pay-offs. Those costs would be higher by an amount equal to any additional fees that the club received for the other players. In other words, if Insua was sold for, say, £500K, those total direct costs (i.e. payoffs) would increase by £500K to £ 4.6M .
During the year, Liverpool paid £44.8M (2011: £89.2M) to clubs for new players bought or for those bought in previous windows while received only £30.6M for players sold (2011: £48.8M). This is expected as transfer fees are paid over a period of time. From the table above , it becomes evident that the club's net spend on players in the last two financial years between 1/8/2010 and 31/05/2012 was around £63M after taking into account termination payoffs and similar direct costs of players sold.
In addition to the contractual transfer fees, LFC has a contingent liability of £16.3M in additional transfer fees relating to players they bought (add-ons). These add-ons fees will be paid to players' former clubs if certain transfer criteria were met like playing certain amount of matches etc.
This contingent liability accounts was reduced by £3.8M in 2011/12 suggesting that the aforementioned players whom were released/sold had add-on fees of at least £3.4M. It's worth pointing that this account increased by £9.72M in 2010/2011 indicating that in addition to the widely reported transfer fees for the players signed under Dalglish and, to a lesser degree, Hodgson- the club has committed to a "minimum" of £9.72M in add-ons fees for those players' clubs on top of the £ 131.1M purchase value . I estimate it is a "minimum" because the contingent liability account would have been reduced by add-ons fees relating to players sold by the club during the year.
In a nutshell, LFC paid £7M in Agents' fees for players bought between 1/10/2010 till 30/9/2011. The club's book shows that new players were bought at a cost of £150M during that period ( 10/11: £131.1M and 11/12: £ 18.9M). Meanwhile; reported figures suggest the cost was £134.7M (£ 120.3M plus £ 14.35M ) in addition to the cost of the new reserve/academy players and the value of Konchesky's swap.
Adding the agents' fee to the reported figure of £134.7M results in total cost of £141.7M which is £8.4M below the costs recorded in the accounts. Even if we assume that those junior players and Konchesky's swap was valued at £3.4M, the reported figures would still short by £5M. The only plausible explanation is that the club actually paid around £4-5m "over and above" the reported figures for the players named in the table above.
The Directors' Report states that LFC incurred a loss of £8.4M on the sale of players between 31/5/2012 and 28/11/2012 (the latter is the date of the auditor's report). During that time frame, LFC sold Alberto Aquilani, Dirk Kuyt and Charlie Adam. Kuyt was reportedly let go for £1M, which was his approximate book value. Aquilani had an estimated book value of £7M, while Adam was estimated to be worth around £5.4M. Assuming LFC received £4M for Adam, this indicates that LFC received a "net" amount of zero(= 7m+5.4m -8.4m- 4m) after the payoff to Aquilani and perhaps to Adam as well.
The club effectively used Aquilani fee to pay him off. In other words, say that LFC received £2M from Fiorentina in transfer fees for Aquilani. In this case, LFC would have paid Aquilani that £2M. This may or may not include a payoff to Charlie Adam. Either way, however, the end result is the same for the club .
Wages and salaries were £109.2M. This suggests an annualized figure of around £131.1M, a £2.2M increase from the previous year. The wage to revenue ratio is 69.5% (in 2011, it was 70.2%).
Apparently drop in wages resulting from departure of players in 2010/11 was offset by Dalglish's new hirings. Liverpool reportedly has some 400 person in its payroll. This is in addition to few hundred part time employees and part time coaches. Furthermore, against popular belief, only 50-60% of LFC's total wage bill is derived from its senior squad. Thus, I opine it is very unlikely to see a massively slashed wage bill for the club similar to that of say, Spurs, unless massive structural change is adopted. Not that it is needed anyway.
Credit to Ed Thompson , an excellent writer at financialfairplay.co.uk, for using this table methodology in his blog and for pointing out that the post balance sheet events are those events up till the date of auditor's report.
Another item of particular interest is the impairment charge in players' registration of £8.9M that the club incurred during the reported period. Players' registration is the transfer fees (along with any related costs, such as signing-on fees and agents' fees) that the club pays to acquire players. These fees are labelled as "Intangible Assets" in a football club's books. They are amortized over the duration of a player's contract.
For example, Andy Carroll's £35M fee is spread out over 5.5 years, costing the club £6.4M per year in addition to his wages. From an accounting perspective, impairment occurs when an asset's (in this case, the asset is a player's value) recoverable amount is greater than its carrying amount. Recoverable amount is taken as either the amount that will be obtained through selling the player or the amount of benefits that will be obtained through continuous use of the player.
This unusual charge to LFC's Profit and Loss account is a non-cash item, but it significantly reduced the club's profitability. Liverpool is fundamentally writing down the value of player(s) in its books. This charge accounts for approximately 6.7% of the book value of the club's complete squad.
Accountants will tell you that the prudence concept requires that assets not be overstated and that liabilities not be understated. The impairment is in line with accounting principles.
2- Change in legal or regulatory framework affecting a player's fee, like the FA/UEFA imposing cap on players' transfer fees. This is not applicable here.
4- Smooth profitability or artificially reducing the profitability of the club in order to record better results in the future. This might have been applicable if the charge was in 10/11 accounts in anticipation of Financial Fair Play.
LFC fans would hope that those charges relate to players who are still in the club's book and not those who have already left.
To put LFC's debt situation in perspective, FSG reduced the club's annual debt servicing obligations from £17.6M per year to around £3.7M when it acquired LFC. In November 2010, following UKSV Holdings' acquisition of LFC, John W Henry said that out of the total debt incurred by Hicks and Gillett, only about £37M in stadium-related borrowings has been left with the club. That £37M was borrowed by Tom Hicks and George Gillett from the Royal Bank of Scotland (RBS) for preparatory work on a Stanley Park Stadium.
We removed all debt but the stadium debt. LFC is not servicing debt other than stadium debt, which is, of course, true for now, and it should be stressed that clubs commonly use such facilities for working capital purposes.
The £37M (which is actually £37.7M) was a short term facility (overdraft) borrowed from RBS and was part of a combined credit facility of £ 97M that was also offered to "Kop" ( the previous holding company controlled by Hicks-Gillett that owned LFC). As per LFC's annual statement, the package was secured by the club's assets. The annual statement indicated that the £97M facility was for "working capital " and "new stadium development."
This £37.7M was initially set to be repaid on 24 January 2010, but it was extended until April 2010 and then again to 31 May 2011 due to the struggles of the former owners. LFC appears to have paid an astonishing £5.9M ( listed under "Other Finance Costs") to banks to receive extensions on the maturity date.
LFC made arrangements with three banks: The Royal Bank of Scotland (RBS), Barclays, and Bank of America. These banks agreed to provide LFC with a £120M line of "on demand" credit. The facility runs for three years. Up to £45M has been allocated for the "existing stadium project" (i.e., Anfield redevelopment), while the remaining £75M is to be used for "general working capital and letters of credit."
For clarification, LFC did not actually borrow £120M. Rather, this amount is available on standby if LFC happens to need it. Just like a credit card, the banks' funds are there for LFC to use, but LFC will not incur any debt or owe any interest payments until it takes advantage of the funds.
During the financial year, LFC took a longer-term bank loan of £69.9M from the £120M facility to refinance the £37.7M stadium loan. Therefore, the net bank loan increase is £32.1M. This new loan is repayable between mid 2013 and mid 2017. The £69.9M loan was comprised of the £37.7M (under the agreed-upon £45M facility for the stadium development) and £32.2M for working capital purposes (under the agreed-upon £75M facility).
However, it appears that on August 2012 (after the financials), the parent company, UKSV, provided LFC with a £46.8M interest-free loan, of which £37.7M went to repay the stadium loan and £9M went to repay part of the £32.2M borrowed for working capital purposes (namely the acquisition of players). The long-standing stadium bank loan is now owed to FSG through UKS as an interest-free loan.
Subsequently, LFC has a bank debt of £23.1M and can now borrow an additional £86M for working capital (namely, acquiring and financing players) from the £120M facility.
LFC's effective interest rate on its bank debt is around 4 to 5.2 percent. This is a significant decrease from when it was between 12-17% under H&G. Although the club now has an interest-free loan from FSG, it used to incur around 9% in its borrowing from "Kop" under its previous leadership.
The former owners of the Anfield club have settled a legal dispute after making allegations against current director Ian Ayre, Sir Martin Broughton, and Christian Purslow. Broughton and Purslow have both since left the club, and the High Court has forced its sale.A statement on Liverpool's website read:
In October 2010, Liverpool Football Club and Athletic Grounds Limited was sold to the Fenway Sports Group. As a consequence of that sale, Tom (Thomas) Hicks and George Gillett made a number of allegations and claims against Sir Martin Broughton, Christian Purslow and Ian Ayre. Those allegations and claims were denied by messers Broughton, Purslow and Ayre…and resulted in legal proceedings being commenced. The parties have now agreed a settlement. All claims and allegations made have been withdrawn by Hicks and Gillett and all legal proceedings between the parties concluded.
The details of the settlement will remain confidential. Hicks and Gillett took control at Liverpool from David Moores in February 2007. Following publication of the club's statement, Purslow issued his own:
I am delighted we can finally close this traumatic chapter in the history of Liverpool FC ……I would particularly like to thank Sir Martin Broughton for agreeing to come to our club to lead our board at a difficult time, all my fellow Liverpool supporters, members of LFC staff and the entire football family for their unwavering support and the solidarity shown to me during my time at Liverpool – especially over the past two and half years since I stepped down.
Purslow thanked neither FSG nor LFC in his statement. However, if there was something for him or Ayre to be thankful thankful to those, it might be recorded in the club's next set of accounts (unless it is recorded in UKSV's books).
Andy Carroll will have an estimated book value of £20M by the time the transfer window open this summer. The club would have by then written down £15M in fees amortization. While it's unlikely that Carroll will command a £20M sale price, one way to reduce (and possibly eliminate) the loss on his sale is to swap him with another player(s).
Hatem Ben Arfa (HBA) has been rumored to be the player targeted in Carroll's partial (or straight) swap .Setting aside the opinions about HBA's suitability and fitness, LFC has a strong case to argue that HBA's value is £20M based on his age, average goals and assists per game during the last 3-4 seasons in comparison to say £22M Samir Nasri. A partial or straight swap will also reduce the annual amortization expense, as this £20M will be evenly spread over the contract period of the new player(s) ( e.g. £4M for 5-year contract) instead of Carroll's £35 million fee which yields annual amortization expense of £6.4M.
LFC's average recurring expenses are around £215M a year comprised of operating expenses of £170M (wages ≃ £125M and other operating expenses ≃ £45M) plus players' fee amortization (≃£45M a year). In my opinion, the club should aim to keep these expenses at a maximum of 85% of revenue for its long-term sustainability. Wages are one major element, but they are not the entire story.
It's a common misconception to link the transfer fees of players who have been sold with those who have been bought and come to a net spending figure, then start worrying about the difference in wages of departing vis- à – vis incoming players much thought towards transfer fees amortization.
Torres was sold for Carroll for +£15M. The profit on Torres was booked in the year of the sale (January 2011), while the cost of Carroll will be spread over 5.5 years.
There are two components to player costs – the wages and the fees. The transfer fees for a player are amortized evenly over the duration of his contract. The club feels the impact of this every year. Buying new players for £20M ever year would increase amortization by approximately £4-5M every year. Aquilani's two last loan spells ensured that Liverpool was minimally impacted by his wages, yet the club could not do anything about his annual £3.5M fee amortization charge to its books which is around £70K a week .
In my opinion, the club needs to obliterate around £10-15M in amortization expenses and raise additional £5-10M through reduction of wages and/or from sale proceeds during the next window, especially as the club continues to add new players. This can be achieved by selling players whom were bought recently for high fees (i.e. having high amortization charge and preferably those with high wages), selling high value players and/or, selling seniors players with low book value (whom the club bought relatively cheap or bought them long time ago) but have decent re-sale value, and replacing the latter with younger players of similar quality.
The table below show the six senior players with the highest annual cost to the club along with other players with low book value (namely those 28 years old and above).
For information purpose, Daniel Sturridge and Joe Allen's annual cost is approximately £5.7M while Lucas Leiva's is around £4.1M based on rumoured wages and transfer fees. The implicit caveat applies that all wages are based on widely circulated figures. A £10K difference in weekly wage would result in +/- £520K change in annual wages.
The green highlight shows the top five possible sale candidates under each category, the two columns on the right refer to one criterion: profitability on sale.
Regarding the stadium issue, if the club went for £150M financing, the estimated annual installments would be around £16-16.7M. Annual instalments for a £100M loan would be around £10.6-11M for a 15-year term loan. An additional 15,000 seats, selling for an average of £43 per ticket, would bring additional match day revenue of £14.5M if there were 25 home matches a season and 90% occupancy (revenue would be £12.8M for 22 home matches). This does not include any grace period, lost income and accrued interest during development/construction.
From a financial perspective, naming rights would be equally ideal for the club and the fans. However, Ian Ayre has ruled out selling the naming rights for Anfield after Newcastle United changed the name of St. James' Park. Whether or not this will continue to be the club's stance remains to be seen.
That would entail slashing the wage bill massively to bring it down to levels of similar clubs in sixth to eighth position in the league table. A lot of the reduction in wage bill has been by accident rather than design: Kuyt, Bellamy and Maxi left the club on their own volition rather than being pushed out. Running the club as business would entail having a clear-out period preceding any new players purchase. FSG have continually invested in the club throughout. Many suggested that FSG bought the club for "peanuts" while recent academic papers, published by Tom Markham from Reading's ICMA Centre, suggested that the club's recent valuation of £352M was not far from the price that FSG paid for it and is substantially less than Forbes' £530M valuation in April 2010.
On the bright side, LFC's expected revenue for 2012-13 should show a £30M increase in commercial revenue alone since the FSG takeover in 2010. Compare this increase with the UEFA's Champions League distribution of €23M to Arsenal, €33.3M to Manchester United, and €23.7M to Manchester City for participating in the group stages in 2011-12. The new TV deal should also add £25-30M to the club's coffers in 2013/14 onwards.
With transfer activity guaranteed in the summer transfer window, it seems that if Liverpool FC makes a few intelligent business deals with players leaving and few joining, then their top 4 aspirations and better financial health will be much closer to becoming a reality.
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