Last time I estimated a figure of £59.4m in lost revenue should Liverpool fail to qualify for the 2010-2011 Champions League. As mentioned before, some of this lost revenue will be ‘found’ by playing in the Europa League, so let’s adjust for that to get a more accurate picture of the real financial impact. I will assume the best case scenario for Liverpool and have it win the entire competition. This means it will receive the maximum possible prize money and matchday revenue in our hypothetical. Off we go:
(Unfortunately the Europa League is given much less attention and therefore less documentation compared to the CL; numbers are as best I can find them or reasonably estimate. If I estimate a figure I will tell you when and how I did it).
-£59.4m – ‘lost’ revenue from missing CL
+£3.1m – Prize Monies (1)
+£14.7m – 11 matches * 1.3362 (est. matchday revenue / game as determined last time)
+ £4m – Broadcast revenue (2)
–£37.2m net impact with no CL and a Europa League win
(1) 215k (participation)+ 440k (performance, 4 group wins) + 2.4m (2.65/ 1.1017 , champion prize / exchange rate) =3.1m
(2) I believe that ‘Market Pool’ monies referred to in the UEFA report I found here, refers to broadcast revenue sharing. I have used a figure similar to the payout Manchester City received last year which should reflect similar viewership numbers.
A loss of £37.2m compared to a loss of £59.4m is undoubtedly better for any business, what does it mean for Liverpool specifically?
Liverpool had total revenue/turnover of 159m for the year ended 2008, if we project a modest 5% year-over-year growth on top of that number estimated revenue for 2009 is £167m. Just at a glance we can see that if Liverpool had an extremely poor year where they did not qualify for any European competition it would be disastrous. Revenue would drop precipitously, by almost 36% compared to our 2009 estimated revenue figure. Even the situation above of a Europa League win still results in a 22% comparative drop. Such volatility in revenue is part of the reason that football is such a poor business.
Continuing with our scenario (no CL, Europa League win), projected revenue for 2010 is £129.8m.
The 2008 wage bill was 90m, I will hold this constant as there have not been large changes to the Liverpool squad. The projected player wage / turnover ratio for 2010 rises to 69.3%. While the percentage of revenue spent on player wages is not excessive compared to other clubs it becomes more worrying when taking other factors into consideration, namely Liverpool’s financing situation.
£129.8m – Projected 2010 revenue
69.3% – Projected 2010 wage / turnover ratio
Hicks and Gillett borrowed approximately £300m to purchase the club, this was split between the club subsidiary and their ownership vehicle Kop Holdings Ltd in an 18%/82% ratio. Presumably the debt kept in the club is used to finance club operations, and the debt taken on by Kop Holdings was used to pay back Hicks and Gillett for the purchase price. 2008 saw the debt swell from £244m to £299m due to a refinancing agreement and losses at the club. Interest payments for the year 2008 were £35m, implying an average annual interest rate of 11.7% on Liverpool’s outstanding debt.
As the debt load between 2007 and 2008 increased by approximately the same amount as the group’s loss for that time period we conclude that new investment is not being put into the club to make up the shortfall, rather additional debt is being taken on to finance the club.
If the club operated similarly in 2009, debt would be expected to have increased to £340m and interest payments would be £39.78m a year. Reports from the time corroborate this figure. If nothing was done to change the existing financing mix, debt would continue accruing to £380m by the end of 2010 with payments of £44m a year needed to service the borrowings.
The Perfect Storm
The basics of our scenario are now set up, what happens when we put them together? To get an idea of other costs let’s look at 2008:
+£159m – 2008 revenue
-£90m – 2008 wages
–£35m – 2008 interest payments
+£34m – 2008 group surplus before all other costs
-£43m – 2008 total loss after all other costs (£30m in net transfers, £32m in amortisation, £15m other club costs)
Then apply to 2010:
+£129.8m – 2010 revenue
-£90m – 2010 wages (held constant from 2008!)
–£44m – 2010 interest payments (without any change in financing scheme)
-£4.2m – 2010 group loss before all other costs
–£51.2m – 2010 total loss after all other costs (£32m amortisation, £15m other club costs)
As you can see the drop in revenue means that our hypothetical Liverpool cannot cover just two items on their costs list: player wages and (more importantly) debt service costs. The club is running a loss before all other costs of running the club including employee wages, stadium operations, etc. have been deducted. I have estimated the other costs by taking the profit/loss figure provided for the year and subtracting out net transfer spending, and amortisation. The 2010 figure loss figure of -£51.2m is assuming a transfer policy that nets to zero (value of all players out equals value of all players in).
A LOSS of £51.2m without any possibility for investment in new players. Not something to make a supporter smile.
We can clearly see that without a run in the Champions League Liverpool will be forced to make some drastic changes to their cost structure. Financing options are more available now but because of the large existing debt load may only be accessible at unfavourable rates. It would be almost inevitable that players would have to be sold as player registrations remain the largest assets on Liverpool’s books and the quickest way to raise funds. Needless to say dismantling the squad would be disastrous and likely to result in a spiral in which Liverpool would not see Europe for some time and be deprived of the revenue needed to return.
This is, of course, only a hypothetical scenario, Liverpool may very well qualify this year and be spared the worry of a massive hole in their finances. Recent reports have suggested that £100m in new investment is forthcoming from various investor groups which will help to significantly stabilize the club. Even still, the fact that a club can be one poor season away from a nightmare scenario should give supporters reason enough to be nervous and take a long, hard look at the owners and their treatment of the club.
More than anything else the case of Liverpool should be one more strike against the Leveraged Buy Out (LBO) style takeovers that have happened within football over the past decade. The business case for the LBO strategy is already questionable for stable businesses, when applied to football it simply looks reckless. Nothing will change until it is recognized by the English FA (all FAs for that matter) and Premier League that this practice endangers the entire system and their brand respectively.
Financial regulation must come to football, better now than after a catastrophe.