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A Bad Deal: The flawed logic of the Hicks and Gillett takeover

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It has been evident for over a year that Liverpool is in dire straits financially, straining transfer capabilities and driving fear that the club would cash in on players like Gerrard and Torres to reduce the debt burden. How did we get in this situation? The answer, of course, starts at the beginning: the 2007 takeover.

At its most basic, the leveraged buyout, or LBO, is a simple concept. A group of investors buy a company, borrowing a significant portion of money, perhaps 50% or so of the purchase price. They use the cash produced by the business to pay down the debt, and then resell the company. As an example, investors might put up £100 million to buy a £175 million company, borrowing the difference. They use the profits of the company to pay off the money they’ve borrowed, and when they sell the company, the investors receive the full £175m, netting a £75 million profit. In general, this approach works very well.

Of course, there are obvious pitfalls. If your business doesn’t generate the cash you expect, you can end up borrowing more and more and coming under crushing pressure from your creditors. For this reason, private equity investors have historically focused on companies that minimize the risk of this happening.  This means looking for companies that have stable, predictable cash flows, and which require minimal ongoing investment to keep the business running properly.

Does “stable, predictable cash flows” and “minimal ongoing investment” sound like the profile of a Premier League football club? Of course not! Premier League clubs have revenues that can swing massively on whether a shot is an inch inside the post or an inch outside, or on a referee’s split-second call. Many clubs, particularly those near the top of the table, are well-known for spending £20 million with little or no warning on transfers. The notion that this type of company is an appropriate target for a leveraged buy-out is absurd.

There has been much made of the owners “taking advantage” of Liverpool FC for their personal financial gain. Despite the lofty valuations they are placing on the club, however, as the sale process goes forward it’s looking more and more like there won’t be a financial gain. The fact is that they misapplied the LBO transaction structure and now it’s biting them (and us, the fans) in return.

This realization has significant relevance for the current sale process. When it comes to an end, the Hicks and Gillett ownership will probably have been a financial as well as a competitive failure, but it is possible to take a lesson and try to prevent it from happening again. The fans do not have any input, but fortunately, RBS does. It looks like RBS will escape with their interest intact this go-round, but the bank must be aware of how poor this investment could have turned out. Given that they intend to maintain their relationship with the club, they will hopefully make an effort to pick buyers with a slightly better financial plan than our current ones. It isn’t necessarily bad to have a club be explicitly run for profit, but it is necessary for the business plan to be a sound one.

Strother has just graduated from the University of Virginia and is starting his career as an investment banker this summer.

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5 comments

  • tony says:

    think it is a joke that a club like liverpool there is kmow1 out there in that big world that know1 wants to buy teedle dee & tweedle dum out. We need to get rid of them idiots asap like yesterday as this time next season i dont know ware we will be. Yanks you are not wanted or needed bring in sum1 who cares about our beloved liverpool footbal club y.n.w.a.

  • red2death says:

    The Liverpool board already knew all this prior to entering the deal. They signed with the full expectation that this would NOT be an LBO. What they were working on was an express promise by Hicks and Gillett that they would under no circumstances place any extra debt on the club. That’s a promise H&G broke right from day one, and I’m sure that was when David Moore realized he’d failed in his judgment of them. The rest, as we know, is history.

  • KAMAAL says:

    PLSSSSSSSSSSSSSSSS SUM1111111111 COME N HELP OUR BELOVED LIVERPOOL TAKE IT AWAY 4RM THESE TO MONEY HUNGRY FOOLSSSSSSSSSS PLLLLSSSSSSSSSSSSS!!!!!!!!!!!!

  • Zahid says:

    EVEN WHEN THE SAVIOUR COMES IN IT WILL TAKE THEM FEW YEARS TO SORT OUT THE FINANCIAL MESS LEFT BY THE FOOLS, EVEN IF THE NEW OWNERS DO GO ON A SPENDING SPREE. MOORES AND PARRY SHOULD BE BANNED FOR LIFE EVEN THO THEY DON’T SHOW THEIR FACES ANYWAY, BUT IM SURE MOORES WAS MADE HONOURARY LIFE MEMBER AT THE CLUB BY THE YANKS……YNWA

  • tinydino says:

    when u invest in a business, you’d want the business to grow & prosper…and its not like Jack & the Bean Stalk where it will grow on its on…you need to nurture it, spend time with it, improve it, by pumping more monies and then keep your fingers cross the business prosper & you will make millions from it by selling it off…

    in the case of the the two bloody yanks…they didn’t invest anything…they bought the club with a loan…they offer nothing to the club…they are like fucking parasites…

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