Pitch Fever

Among British soccer fans, the gaffe was as shocking as a player accidentally heading a ball into his own goal. At a February press conference announcing the planned takeover of Liverpool Football Club, one soon-to-be owner, Thomas Hicks, responded to a reporter's query by referring to the team as "the Liverpool Reds."

It was a seemingly minor faux pas — it's either Liverpool or the Reds, not both — and perhaps understandable, coming from a man who has lived most of his life in Texas. In fact, he owns the Texas Rangers baseball club. But Hicks and partner George Gillett were royally skewered on chat boards, reflecting the mistrust that British football fans have for Yank poachers of their beloved teams.

The list of poachers is growing fast. Lured by the vast global potential of the game, U.S. businessmen have been on a two-year trans-Atlantic buying spree. Along with Liverpool, Americans have acquired rival English Premier League (EPL) clubs Aston Villa FC and Manchester United FC. Then, this April, Stan Kroenke, co-owner of the St. Louis Rams (who play that other kind of football) paid $143 million to acquire a 12.2 percent stake in Arsenal Football Club, seen by many as the prelude to a $1.2 billion hostile takeover bid.

These brash American acquirers are going for the gold standard: "Man U," acquired in 2005 by Tampa Bay Buccaneers owner Malcolm Glazer, rivals the New York Yankees as the most recognizable sports brand in the world. Arsenal and Liverpool are not far behind.

While some in Britain seem pleased to have their clubs score wealthy backers, no matter their nationality, critics decry the vulnerability of publicly listed English clubs. In a letter to the Guardian, a former football regulatory official and several members of Parliament railed: "The status of football clubs as publicly traded companies has led to people buying into them who have no interest whatsoever in the game." Even owners seem worried that Americans will trample revered traditions in pursuit of profit. In a recent interview, Arsenal team chairman Peter Hill-Wood observed: "We would be horrified to see ownership of the club go across the Atlantic."

Chauvinism aside, British football fans are worried about the U.S. raiders for a solid financial reason: they're overleveraging to finance the deals. That approach could lead the buyers to spend so much on servicing debt that there would be little cash left over for the team.

Says Gareth Moore, UK director of Sport + Markt, a Cologne-based sports marketing consultancy, "This has the potential to get ugly if the money goes to paying debt rather than players on the pitch."

The ugliness has already started. During the hostile takeover of Man U, Glazer was burned in effigy by fans outside the club's Old Trafford stadium, while others threatened to harm him and his family. Glazer, who made much of his fortune in the rough-and-tumble property-development world, eventually secured enough shares to take the team private.

The team's recent success — Man U clinched the EPL title in May — has calmed things down but hasn't quieted concerns about high debt levels. Interest payments on the borrowed $1.17 billion totaled about $167 million from May 2005 to June 2006, with less than a third of the interest coming from cash flow and the rest from high-yield payment-in-kind notes. Although he refinanced the package in July, Glazer's annual principal and interest payments over the next decade will probably top $100 million — for a club that likely spent half its $330 million in revenue last season on players. A source close to Glazer says that Man U will be able to service the debt through cash flow, and that the owner is considering securitizing gate receipts from Old Trafford. "There's incredible revenue stability," he says. "It's more like a utility than a sports franchise."

Others aren't as sanguine. "Are they going to get massive dividend streams with that level of debt?" asks Bill Enevoldson, a partner and sports-financing expert in KPMG's Manchester office. "Probably not."

Questions about excess debt plague the Liverpool acquisition as well. When Gillett and Hicks announced the buyout, they said the team took on no leverage in the roughly $900 million transaction. Some assumed this meant that the duo paid with their own money — surprising, given Hicks's fame as a leveraged-buyout specialist. (He cofounded buyout firm Hicks, Muse, Tate & Furst.) But when the offering memo to shareholders surfaced, it revealed that the takeover of Liverpool FC had been funded entirely by loans supplied to Hicks and Gillett by the Royal Bank of Scotland. In a subsequent interview with the BBC, Hicks tried to defuse the issue by quipping: "Life has been good to me, but I'm not going to write a check for $450 million."

But somebody will have to write a yearly check for $40 million — believed to be the annual debt service on the initial loans to purchase the shares of the club. That could prove tricky, considering that Liverpool lost nearly $10 million last year. Even Robert Tilliss, an adviser to Hicks and Gillett on the deal, and CEO of merchant bank Inner Circle Sports, acknowledges that Liverpool has "never had commercial success equal to what they've had on the pitch."

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