Re: Close Season Football Chat : Sat Jun 26, 2010 7:31 pm
Just for LGJM this one: 
In August of this year, a documentary will be released which explores the murky world of leveraged buy-outs in football. It is called The Potemkin League, and I urge every single Liverpool and Manchester United fan to watch it. The film is being made by an independent production company called queuepolitely, led by a talented young film-maker called Mike Horwath, who explores the relationship between some of our top clubs, and predatory businessmen.
You can watch a trailer for this film on the queuepolitely website , and it really does make fascinating viewing. It has been suggested for some time that the most insidious aspect of capitalism, the leveraged buy-out, is behind the worst excesses of greed that ultimately caused the global financial collapse we are all still suffering for.
A leveraged buy-out works, in basic terms, like this. An opportunist – they like to call themselves entrepreneurs – finds a company that is under-performing in some way, borrows money (usually from willing banks) to buy that company, turns the company around while repaying any interest on those borrowings with money generated by that company, and then sells at a profit. Using little if any of their own money.
For some reason, football, and in particular, English football, seems to have become a magnate for these people, presumably because of the promise of future growth offered by huge TV contracts, with Liverpool and Manchester United the most high-profile of several who have been bought in this way.
I’m not going to descend too deep into boring financial jargon, because I know most of you would rather watch a damp patch grow, but consider these figures.
Manchester United have been revealed, recently, to currently have more than £1billion worth of debt on their club. Yep, that’s right, a thousand million pounds of debt on the club. That is because the Glazer family bought the club with money borrowed from the banks, and now the club itself must repay a large chunk of the interest on that borrowing.
Liverpool, for their part, have a ‘mere’ £350million or so of debt on the club. What is fascinating, and truly depressing, is that more than 40 per cent that debt is now owed, get this, to their American owners themselves. You don’t believe me, do you? Can’t be possible, can it? It can and it is. Tom Hicks and George Gillett bought Liverpool with money borrowed from the RBS and an American bank called Wachovia.
In the middle of the credit crunch their type of business model helped create, the banks started to lose their nerve, and said that the Americans had to reduce their borrowings. So what did they do, dig into their own pockets? Err, sort of. Hicks and Gillett paid down the debt by almost £150million in total, but only by LENDING it to the holding company that owns the Football Club.
So now, Liverpool HAVE to pay interest to the Americans. It is set a rate of 10 per cent per annum, and isn’t actually being repaid, but merely added as compound interest to the total sum that the club must pay to the Americans.
So not only do Liverpool effectively owe the RBS £228million, they also owe the Yanks £150million…and growing at £10 per cent per year. So in three years’ time, they will owe Hicks and Gillett £200million, for the privilege of the Americans buying the company.
It doesn’t make sense does it? And yet it is allowed to happen. It is this sort of thinking that has put the world economy into the sort of mess that sees people being thrown out of work and whole nations on the verge of meltdown.
And it is the biggest single threat to football as we know it. Liverpool were actually declared by their auditors to have a “material uncertainty” about their ability to continue as a going concern, the second successive year that they have issued such a warning.
Both Liverpool and United are continuing to operate only because of the patience of their banks and the extent of their credit, in United’s case after a series of complicated bond issues that basically allowed their owners to find cheaper debt.
What the Potemkin League documentary asks is, can these sort of figures be sustained? I’d like to ask you the same sort of question. Do you really think that, even in the medium term, clubs like United and Liverpool can sustain debts of billions of pounds and still operate at the very summit of the game?
No one in their right mind can believe they can, surely, not even their American owners? Perhaps that question is most pertinent for the Football Association and Premier League. And another question for the football authorities. Why have Hicks and Gillett and the Glazers bought sporting clubs in England? Answer, because they can’t do it back home.
