Liverpool Financials Show Major Gains Under FSG, Hint at Minority Sale

Last October, Liverpool Football Club experienced both a milestone and the start of a new era when Jürgen Klopp's appointment coincided with the five year anniversary of Fenway Sports Group's purchasing of the club. FSG spent their first five years in charge playing financial catch up with other well-to-do Premier League sides. Now, following the release of financials for the 2014/15 year, we take an in-depth look at the state of the club heading into Klopp's first full season as manager.

The last fiscal year's financial statements for Liverpool Football Club and Athletic Grounds Limited ("LFC") and UKSV Holdings Company Limited ("UKSV Holdings"), the British holding company that owns 100% of LFC's outstanding shares, have recently been made available for public review. The fiscal year-end for LFC's financials is May 31, 2015 and the filing deadline nine months from that date. The statements were filed on February 29, 2016 with Companies House, which released them on their website on March 8^th.

Included in the financial statement filing are the Balance Sheets, Profit and Loss Statements, and the Cash Flow Statements for the last 2 fiscal years. Footnotes to the financials, which provide the reader with a wealth of additional information on the details and financial policies within the statements, are also included. The statement I will review, and provide a bit of insight into, is the profit and loss statement.

However, in order to determine the amount of any "investment" by the ownership group at May 31, 2015, the individual and consolidated balance sheets of UKSV Holdings must be reviewed. The financial statements (balance sheets) of LFC itself provide very little substantive information in regard to the level of investment, and if not completely understood, actually convey a largely inaccurate picture.

The LFC Profit and Loss Statements for May 31, 2015 and 2014 are summarized below.

The statement shows the core business of the club to be functionally operating at a breakeven as indicated by the relatively small amount of pre-tax profit before player trading of £7.4m in 2015 and £6.2m in 2014. The £60m pre-tax profit in 2015 is attributable primarily to the £56.2m profit on player sales. While this has not been an entirely uncommon item, with the club having significant player trading profits in 2011, 2015, and likely again in 2016, it should be considered a "separate item" when characterizing operating results.  The sales of Torres, Suarez and Sterling were each somewhat unique situations and we can't necessarily expect these profit levels on player sales to recur in the future. Each of the three prior years actually reflected losses on player sales. I would also expect that with Klopp in charge, we will better be able to hold on to all of our better players.

It's also worth noting that any profits from player trading since October 2010 have in the end been completely reinvested into the first team squad. In fact, a gross amount of £135m has been "spent" on player purchases in 2015 per the notes to the financials and a gross amount of £79m "received" from player sales per transfer league, for a net spend of £56m.

The £135m would include all costs of acquiring players: agent commissions, signing-on fees, and legal fees associated with negotiating, drafting and finalizing player contracts. It would also include contingent payments from prior years' player acquisitions where the performance criteria were met in the current year and that were not previously considered likely to be paid.

Broadcasting Revenue

The 2015 broadcasting revenue of £122.6m is comprised of £92.8m of Premier League distributed funds, £25.9 of European competition payments, and £3.9m of other broadcasting revenue primarily from cup competitions. The increase of £21.7m from 2014 results primarily from being in Europe in 2015 but not in 2014. The merit-based payments are based on league finish and are reduced £1.2m per final table position. Facility fees are paid each time a club's matches are broadcast in the UK. The table below summarizes broadcasting revenue for each year as well as the year-to-year changes.

The new 3-year, £8.2 billion TV deal for 2016 through 2019 has increased 52% from the old £5.4 billion deal. This will create almost an additional £50m in LFC's Premier League distributed payments beginning with the 2016/17 season, brining it to about £140m/year.

Matchday Revenue

The increase in matchday revenue by £8.1m to £59m in 2015 is attributable to the increased number of matches played in the FA Cup, the Capital One Cup, and being in Europe.  In 2015, LFC played 4 home European matches  (3 CL, 1 EL), 7 FA Cup matches, and 5 Capital One Cup matches. In 2014, the club played only 2 FA Cup games, only 2 Capital One Cup games, and were not in Europe.

Matchday revenue from the FA and Capital One Cup matches is split, with 45% going to each team and 10% to the organizing body for prize and operating funds. Each club retains its own matchday revenue for home European matches. A summary and analysis of matchday funds is provided in the below table. Noteworthy is that the £12.6m increase in matchday revenue from 2014 to 2015 comes despite a reduction of £4.5 from pre-season, with the 2014 pre-season including some huge attendance figures from the Australia and Indonesia venues.

The equivalent number of home matches is calculated using a .45 factor for all home cup matches and away cup matches against "big" teams and a .25 factor for away cup matches against smaller and non-Premier League teams.

In regard to the recent ticket pricing issues, when one analyzes the club's original ticket proposals for increases in 2016/17, the club is likely forgoing around 12% of matchday revenues ("MDR") as a result of their concessions to fans. That's the magnitude of the "give back" from the owners, and fair play to them.

Having said that, I still expect the 2016/17 MDR increase from the additional 8,500 seats to be about £20m, due primarily to the 4,500 corporate seat component, making for something of a win-win: local fans get a 2 year price freeze or price reduction, game categorization is eliminated, and there are some great incentives introduced for youth, ticket giveaways, and reduced price GA tickets but overall revenues still increase.

I would project the 2016/17 MDR to come in at £80m, assuming LFC again have 27 equivalent home matches. The matchday revenue per equivalent home match for 2016/17 with the stadium renovation should be around £2.7m. Twenty-seven equivalent home matches x £2.7 plus around £10m for pre-season = £83m. That amount will of course be reduced if the club miss out on Europe or fail to progress in the cups.

Commercial Revenue

The club's main commercial partners are New Balance, Standard Chartered, and Garuda Indonesia. The New Balance kit deal is worth £25m per year through 2018. It includes an arrangement whereby Liverpool control all non-branded merchandise (products outside the normal kit range) and are free to open club stores wherever they choose. According to Ian Ayre, the commercial revenues show a "massive growth" in the club's retail infrastructure with 180 new franchise or concession retail businesses around the world.

The Standard Chartered sponsorship deal is £20m per year through 2015/16 and £25m to £30m per year through 2018/19. Garuda Indonesia is the club's training kit partner at £5.5m per season through 2015/16, but they are considering not renewing the deal. If they don't hopefully the club can find a replacement.

There is a naming rights deal for the new stand in negotiation that has been reported to possibly be a 10-year, £90m deal, which is much higher that the £5m per season originally expected.

The £12.5m increase in commercial revenue is due to 12 new sponsorships and the opening of 180 new retail outlets. New sponsorships from Garuda (£5.5m), Subway and Dunkin Donuts have been added in 2015. Our £116m commercial revenue for 2014/15 exceeded Arsenal's £103m, Chelsea's £113m and Spur's £59m. Only one team in the Prem, who shall remain unnamed, outperformed our commercial department based on merit. The relevant lesson to be derived from the excellent commercial performance of Man City (£174m) and PSG (£226m) may not be anything other than how amazingly simple it is to transform a tiny percentage of the vast personal wealth of their owners, owner's friends and business associates into commercial revenues within a football enterprise. The performance of Bayern (£212m), Real (£188) and Barca (£186m) may suggest that there is some room to grow in this department. Liverpool opened a new office in London in October 2014, to strengthen the club's commercial partnership offering and service the expanding international business. I would expect that most of the 60 full time commercial and administration staff added in 2014/15 were staff positions for the new London office.

Total Revenue

The £42.3m increase in total revenue in 2015 is a 16.5% increase from 2014. It is a larger percentage increase than any of the other big Prem clubs which are City at 2%, Arsenal at 10%, Spurs at 9% and United had a 9% decrease and Chelsea a 2% decrease. Looking at the table below summarizing the overall revenue increases and decreases, we can see how significant a factor our European participation is to our 2015 revenue performance.

Salaries/Staff Costs

The salaries and wages expenses include not only the wages and bonuses for first team players, but the wages for 438 commercial and administration employees, another 119 non-first team players, managers and coaches, 53 grounds and maintenance staff, and 1,368 part-time employees. Also included in salaries and staff costs are social security and pension costs.

Looking at Sporting Intelligence's 2015 salary survey, my estimate is that the salaries, bonuses, and employer social security costs for first team players, managers, and coaches are approximately 80% of the total salaries. Salaries and player amortization make up 87% of total costs. Player salaries and player amortization would comprise about 75% of total costs. A table summarizing our salaries for 2015 and 2014 is below.

While the club's total wages have increased £22.4m from last year, the wages as a percentage of revenue has remained constant at about 56% and is similar to Arsenal's 58%, Spurs 56% and City's 55%. The total salaries and wages of £166m are 5^th in the Premier League and are £24m below Arsenal's £190m; Arsenal's wages are 14.5% more than ours. If we focus only on the wages and exclude social security, pension and the manager's salaries Arsenal's wages are £158m and ours are £141m; Arsenal's are 12% more than ours. I'll be very curious to see Sporting Intelligence's 2016 salary survey, and see what the numbers show for 1^st team salaries alone. I would also expect, with the new 2016/17 TV contract with £50m additional revenue and our additional annual £30m of revenue from the stadium renovation, the disparity between our individual average 1^st team player wage amounts and Arsenal's to be falling well below 10% in the immediate future. At what point does that reduced percentage difference become statistically irrelevant to expected league performance? My guess is immediately in the 2016/17 season due to the addition of Jürgen Klopp as manager. Boom!

Profit on Player Trading & Player Amortization

The profit on player trading is the difference between the transfer fee receivable less the net book value of the player on the balance sheet at the date of sale and less any direct costs of transfer.

The other acquisition costs capitalized would be comprised of agent commissions on player purchases and contract modifications, signing bonuses, and any other costs of acquiring or retaining players.

Costs of transfer fees paid for a player's registration and all other costs incurred on acquiring players are written off (amortized) over the life of the player's contract. When a contract is extended or renegotiated, the amortization period of the unamortized player cost on the books at that point is extended and written off over the new contract period. The gross cost of player acquisitions on the books as of May 31, 2014 was £240m. The gross cost of player acquisitions on the books as of May 31, 2015 was £316m, an increase of £76m. £135m was "spent" on player acquisitions (costs, includes agent fees) in the summer of 2014 and £58m was eliminated from the gross player costs on the books due to sales.

The gross player cost at the end of this financial year, May 31, 2016, will be about £400m. Compare that to the £173m amount at July 31, 2011, and it's clear the club is spending money on players. The table below summarizes the player cost on the books and the related amortization for 5 years.

The net transfer spending for the 5 full years of FSG’s ownership, 2011 through 2016, is approximately £172m per Transfer League and after adding an estimate of £10m for Danny Ings tribunal fee, or about £35m per season. Considering that this spending amount is calculated after the sales of Suarez and Sterling it’s a very decent level of spending. The net spending for the 5 years prior to FSG’s acquisition was £49m, or about £10m per season. Looking at the last 3 seasons, 2013 to 2016, out net spending is about £97. Only City and United have spent significantly more. (Note-The £73m mentioned by Swiss Ramble is increased by £10m for Ings estimated tribunal fee, £5m for Grujic, and excludes the £9m QPR sell on fee for Sterling).

FSG has mentioned that Klopp will have £60m of available funds to spend this summer before including proceeds from player sales.

Investment and Valuation

When FSG took over the club in October 2010, finances were in complete disarray. Royal Bank of Scotland (RBS) was owed £230m and unwilling to extend the loan due to a rapidly deteriorating financial situation. The bank debt level itself was at 1.4 times net revenue. Salaries were at 70% of net revenue. Interest costs at the club level were almost £20m with a further £23m incurred at the parent company level, for a total of £43m that needed to be serviced. The annual interest costs alone were over 25% of net revenue.

There is a very good reason there were only two legitimate, interested buyers in October 2010, when LFC was facing possible administration from RBS formally calling the immediately owed debt obligation. The thought, then, that FSG acquired the club significantly below market value in October 2010, considering the magnitude of the existing financial issues, is not particularly accurate.

The new owners saw a struggling asset with a huge potential for growth, but that growth has required a great deal of hard work to develop revenue sources and get costs and debt levels in line. They have also been somewhat fortuitous in their timing, in that the 2016/17 TV deal will provide almost £140m in annual broadcasting revenue, close to £85m more per year than when they acquired the club. That £85m will make up 20%+ of 2016/17 revenues.

All told, FSG had invested approximately £350m  in the club as of May 31, 2015. This amount is readily and easily determinable by looking at the balance sheet of UKSV Holdings. These funds were used to pay off the £230m RBS loan on acquisition and simultaneously acquire a 100% interest in LFC.

Beyond those initial payments, approximately £118m has been put into the club as interest free "intercompany loans." About £69m of these intercompany loans were converted to equity on LFC's books in 2015 in response to FFP requirements, and the resulting investment on UKSV Holdings' balance sheet is £299m (£230m + £69m).

The remaining £49m is an interest free intercompany loan for the stadium renovation. The £69m intercompany loan that was converted to equity in 2015 and existed at May 31, 2014 was created by loans to fund operations in year one (7/31/11) of £22m and a specific loan of £47m in August 2012 to pay off the old £38m stadium renovation plan loan and pay down £9m of the credit facility.

Man City Valuation and LFC Minority Interest Placement Possibilities

A few recent media articles have mentioned the possibility of a sale of a minority interest in the club by FSG. Considering the December 2015 Man City sale of a stated 13% interest in City Football Group ("CFG"), Man City's British parent company, to a Chinese consortium (CMC Football Holdings, Ltd. - "CMC") for a fee of £265m, I would not be at all surprised to see FSG negotiate and similarly sell a minority interest in UKSV Holdings.

The Man City sale actually only transferred a 10.7% interest in CFG, looking at the outstanding share filings with Companies House. The shareholder ownership %'s after the acquisition say that CMC owns exactly 12% of the of shares of  Abu Dhabi United Group,(ADUG), CFG's majority owner. This means CMC's ownership % of the entire CFG entity is 10.7% (12/112). This 10.7% sale by Man City for the reported "fee" of £265m, creates an implied total valuation for Man City of almost £2.5 billion. This valuation is 2.8 times the Forbes valuation of £882m in May 2015. The recent magnified interest in football by China is not only pushing certain player values into the stratosphere, it appears to be having a similar impact on valuations of top clubs.

The Man City valuation does not mean that City can be sold tomorrow for £2.5 billion, but it certainly raises the distinct possibility that such a valuation is possible.

Forbes placed a valuation on LFC in May 2015 of £630m. The club came in at number eight worldwide, while Man City came in at number five. This valuation did not include the anticipated additional revenue from the stadium renovation. If it had, that May 2015 valuation would have come in at between £700m to maybe £725m. Considering the recent Man City minority interest sale, and the factor that a valuation based upon their minority interest sale "could be" up to 2.8 times the May 2015 Forbes valuation, this would place a "theoretical" valuation of between £1.4 billion and "up to" £2 billion on LFC.

Man City does hold 2 additional properties within its holding company, NYCFC and Melbourne City, FC, but the vast majority of their value will be attributable to Man City F.C. A 10% to 15% minority interest sale in LFC/UKSV Holdings could very possibly raise between £140m and £300m.

This valuation discussion is all theoretical at this point and we will see what, if anything, may transpire from the briefly mentioned possibility of FSG undertaking a minority placement. But it does provide some idea of how the equity values of top football clubs may be taking off due to the recent magnified interest from the Far East, and this should be good news as it will provide added funds for the club as well as allow FSG to ameliorate a portion of their £300m investment (non-loan) balance.

If Jürgen Klopp were tasked with reporting a too long, didn't read version of the club's financials, he might sum it up as "Everything is cool in this moment" before letting out a hearty laugh. And it's not just in this moment that things are looking good for the club. The future also looks incredibly bright. The five years of financial recovery FSG has stewarded appears ready to begin paying off in a major way, and the timing could not have been better for Klopp to arrive to reap the benefits, with the manager seeming certain to be given the backing to make good things happen on the pitch as good things continue to happen off of it.

Notes: 1) Here's a PDF of all the tables in this piece. 2) Though there was a wealth of information included, unfortunately we were unable to fit in more details on topics such as Financial Fair Play issues (both UEFA and Premier League), revenue and profit/loss projections, transfer spending, revenue comparisons to the other big clubs in the EPL and in Europe, the new mega TV deal, the new Spain TV deal and its impact on Barcelona and Real Madrid, prior year's losses and the impact that had on the increase in quality of the first team squad, etc. Sorry, friends!