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Pitch Fever

American investors spend it like Beckham — and borrow heavily, too — to buy UK soccer teams. The big lure: global branding.
John Goff, CFO Magazine
June 1, 2007

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."


That, of course, presents an opportunity for Hicks and Gillett. But some observers think Liverpool FC ultimately will suffer from all the borrowing, particularly if the club sells off star players. Says Phil French, a former EPL official and current director of Supporters Direct, a UK-based fan and ownership group: "What we don't want to see is an acquirer loading a club up with a lot of debt, then stripping its assets to pay off the debt."

Cheaper than the Cubs
The genesis of the current bidding war is traceable to the 2003 cash purchase of Chelsea FC by Russian oil tycoon Roman Abramovich for $280 million. Abramovich has since gone on a player-buying binge, netting two league titles for Chelsea in the process. The team, called the Blues, has bled red, however — losing about $450 million over the last two years.

Forced to compete with Chelsea's spending, rival club boards have sought other rich suitors. Enter the foreigners from across the Atlantic. The Americans seem drawn by the relatively modest asking prices, compared with pro sports in the United States. Tribune Co., for example, reportedly is asking upwards of $800 million for the Chicago Cubs. A lucrative television contract recently signed by the EPL has also drawn the interest of potential buyers. The 20 Premier League teams will divvy up nearly $3.2 billion in exchange for UK broadcasting rights over three years, a 60 percent increase from the previous contract, giving top teams TV revenues of more than $100 million. And that's before a new global EPL broadcast contract kicks in, boosting income and further exposing the league to viewers in the Middle East and Asia. The Yank owners see huge potential in such markets, given that past EPL branding efforts have been amateurish. In looking at the possibility of untapped global allegiance to Liverpool, for example, Tilliss says that "the market extensions are off the chart from anything we have in the U.S."

The extensions might even include traditionally soccer-unfriendly America. With British legend David Beckham adding star power to the Los Angeles Galaxy of Major League Soccer, and with EPL broadcasts now available on the Fox Soccer Channel, U.S. fans of the beautiful game may become a market force. U.S. sponsors, too: insurance giant AIG is reportedly paying about $110 million for the right to plaster its logo on the fabled red shirts of Man U for four years.

John Goff is a senior editor at CFO.


Strong in the Net
The top 10 European pro soccer teams in revenue. By comparison, the New York Yankees grossed about $300 million in 2006.
Team Country Revenues*(in $ mil.)
1. Real Madrid Spain $396
2. FC Barcelona Spain $351
3. Juventus Italy $341
4. Manchester United England $329
5. AC Milan Italy $327
6. Chelsea England $300
7. Internazionale Italy $280
8. Bayern Munich Germany $277
9. Arsenal England $261
10. Liverpool England $239
*Matchday, broadcast, and commercial sources for the '05–'06 season
Source: Deloitte



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