An article syndicated throughout the US press overnight claims that Tom Hicks is looking to refinance the whole of his sports empire as part of a bid to take over full control at Anfield. The implication is that he’s so determined to hang onto Liverpool Football Club that he might just allow other investors to get a stake in everything he does in sport.
His 50% shareholding in the Reds is just one part of his sports empire, as well as the Reds he owns the Texas Rangers (baseball), Dallas Stars (ice hockey) and Mesquite Championship Rodeo (rodeo, unsurprisingly) amongst other interests including stadia. All of these come under the umbrella of the Hicks Sports Group, previously called Southwest Sports Group. The name change helps avoid stories like this default on a $135m loan by this Hicks sports group appear when searching on Hicks’ activities in sport.
The syndicated article is by Rob Harris of the Associated Press and is headlined, “Tom Hicks seeks control of Liverpool.” It claims that Hicks’ preferred choice to buy Gillett out of LFC would be to raise private equity. The claim comes from “a person familiar with Hicks’ plans” – probably someone from inside the Hicks camp itself – and says that the private equity bid could possibly include his entire sports group. This familiar person spoke on condition of anonymity.
Hicks’ outburst earlier in the week the to the Fort Worth Star-Telegram made it clear that George Gillett was looking to sell out to Dubai International Capital, and included a claim that Gillett had to get Hicks’ permission for the sale to go through. A false claim, given that the only block Hicks can put on the sale is to match the offer himself and take up his first-refusal option.
It’s no real secret Gillett wants out, and no real secret DIC are the only bidders if Hicks can’t match their offer. Harris says he’s had it confirmed that Gillett was in “ongoing discussions to sell to DIC”; this coming from a “financial industry executive familiar with negotiations”, again the information handed over on “condition of anonymity because of the sensitivity of talks”.
Because the club was landed with £105m of the full £350m debt – taken out with a week to go until they defaulted on their original purchase loan – the actual figure required to effect a takeover may turn out to be as little as $300m, around £150m, according to the report. That’s half of the £245m dumped “at holding company level”, plus some profit for Gillett.
The task for Hicks to raise half of £245m (plus profit for Gillett) is obviously less difficult than raising half of £350m (plus profit for Gillett), but less difficult doesn’t mean easy. The figure quoted in the article would bring Gillett a profit of £27.5m for a year of work that entailed a few flights, a bit of scarf wearing and making a long list of empty statements.
Given the difficulties the owners had in securing the original finance package, there’s nothing that says this attempt by Hicks will be met with anything other than the same, if not further, difficulties. Private equity investors will be no more willing to risk their money without checking out the risks than a bank is. Whatever it was that prevented the banks from putting any more than £105m debt onto the club is still there, whether it was reluctance on the part of the banks themselves or pressure from other board members. It was four months after first mentioning they’d tried to refinance their debts before they finally got approval, and that approval came reluctantly. Both owners’ assets have significantly dropped in value since takeover, largely because of the credit crunch, meaning they had to use a larger proportion of their assets than preferred in order to secure the finance.
Why didn’t Hicks buy Gillett out in January, by which time the Canadien’s owner had already lost interest? He couldn’t – the banks wouldn’t lend the full amount to him alone. And he clearly had no other investors willing to join him.
What Hicks is trying to do now is persuade other investors to put their money where the banks wouldn’t. With the known facts about the Liverpool situation as they are, investors will be reluctant which is why he’s now considering allowing them to get a stake in all of his sports businesses as part of the deal. He wants to use the Texas Rangers, the Dallas Stars and the rest to prop his Liverpool FC investment up. He’s hoping that eventually there’ll be something to gain from the mess he and Gillett made at Anfield.
Somehow he’s got to the use his charms to persuade other investors that the banks were wrong not to back him.
If the potential investors look into the background of the deal, they’ll see why the banks were reluctant to lend the money. The banks’ agreement ultimately came down to the guarantees in place that give the banks a way of getting their money back if it goes wrong. If the club can’t pay the interest on the loans, and all the club’s best assets have been sold then the banks can seize the personal guarantee assets from the owners and sell them to get their money back. As long as the banks are satisfied the assets more than cover the amount borrowed, they know they’ll get their money back. Private investors won’t get that safety net – if the plan fails then they lose their money.
And Liverpool’s long-term future is very much on a knife’s edge and the plan could easily fail. Failure to finish in the top four would be a disaster for the club, and Liverpool are the only one of the teams in the fourth place scramble where failure would bring major problems. It certainly adds to the pressures on the players and manager knowing that fifth place could result in a need to sell players in the summer, signalling the start of a downward spiral like the one Leeds United were ruined by not all that long ago.
Last year Liverpool’s transfer spending was a net £20m, thanks in part to an unusually good summer for player sales. If the owners are to be believed, that £20m was funded in part by borrowed money. They imply the club couldn’t even afford that £20m. Liverpool made something like £24m for their Champions League run, all the way to the final, yet had to borrow before they could spend £20m on transfers.
To potential US investors not familiar with the transfer systems in European soccer, £20m, around $40m US, may sound like a massive amount of money. It is a massive amount of money – but not in terms of spending amongst the top teams. Last season’s champions Manchester United spent more than Liverpool on their transfers last year. They spent a net figure of around £25m ($50m US approx) in 2007. Potential US investors may feel that Liverpool’s spending was pretty close and hardly worth getting worked up about, but Manchester United spent around ten million dollars more than Liverpool on improving a squad that was already way ahead of Liverpool’s in terms of strength.
Gillett and Hicks were brought in to close the gap on United, but in effect, Manchester United increased the gap by £5m, and that gap is clearly getting wider. In a similar way, the gap between the Reds and the teams outside last season’s top four is getting narrower. Liverpool absolutely must spend on a par with their rivals just to remain in the same position, and given that this season’s position is fighting for fourth place then that’s clearly not enough.
Potential US investors may also have failed to grasp the importance of fourth place. It brings a place in the Champions League qualifiers and a good chance of entry into the Champions League proper. Even that’s no guarantee, as Everton found out in 2005-06, but – winning the competition apart – you don’t get a chance at all if you finish outside the top four.
Liverpool’s £24m from last year’s run, and their £28m income from player sales add up to around £52m. Rafa spent £48.5m on players, but the owners say they had to borrow to allow this to happen. They had to borrow £25m they say.
Keep in mind that Liverpool had no £30m interest payments to find last year, and the owners say they had to borrow £25m to help pay for Torres and Babel. Without £24m of Champions League money, they’d have needed to borrow £49m to help buy the pair. Without the unusually high £28m income from sales, they’d have had to borrow £77m to buy the pair. Babel cost £11.5m, Torres £20m, a total of £31m. So take away Liverpool’s CL income, take away the money coming in from player sales and take off the cost of Torres and Babel and it sounds very much like the owners would have needed to borrow £46m just to break even on everything else. That’s without £30m of interest payments that are due from this year onwards. The £46m figure would include around £17m spent on other players, purchases of the likes of Lucas and Arbeloa amongst others leaving a shortfall of around £29m had there been no Champions League money coming in, and no movement of players.
Even with the £24m Champions League money coming in, the club seems to have made a loss last year, based on the owners claim to have borrowed £25m for transfers. We spent a net figure of around £20m on transfers. They borrowed more for transfers than they spent. So even if all transfers in and out had been frozen, and despite going all the way to the CL final, Liverpool were around £5m short of having what they needed just to tick over. Unless of course the claim of borrowing £25m for transfers was a lie.
Quite how Liverpool are going to survive now with a massive debt burden and no new income streams is something of a worry for fans. The £5m loss is neither here nor there in that some of it will have been as a result of the club’s expenses for the takeover itself, and Liverpool have never been set up to make a profit, but now we have the added £30m a year to find in interest payments, the worries are massive. Never mind buying new players and keeping pace with other clubs’ spending, if we miss out on £20m in Champions League money we’ll be forced to sell players.
DIC want to see Liverpool’s books before they make a move, and so would any right-minded potential investor from the US. If they’re also looking at buying into the other Hicks Sports interests, they’ll need to see those books too. Both owners are as entitled as each other to allow their interested parties to look at the books. And it’s important they check them carefully.
Hicks is refusing to offer shares in his Hicks Sport Group on a public basis. The article reports: “A person familiar with Hicks’ plans ruled out a public offering of shares in Hicks Sports Group, which includes baseball’s Texas Rangers and the NHL’s Dallas Stars as well as the 50 percent stake in Liverpool through Kop Holdings. The person cited volatility in the global financial markets. The window of opportunity for that option may reopen before the end of the year, but isn’t currently viable, the person added.” No doubt Hicks doesn’t want it broadcasting that his sports group, recently forced into laying-off staff, is not as buoyant as he would like.
This person referred to told the reporter that “Hicks has been looking into the feasibility of a private placement to raise money” and that although DIC and Gillett are in “constant negotiations”, DIC are only interesting taking a controlling share of LFC. This in turn, he says, would require Hicks to sell some shares which he’s not willing to do.
The article quotes “another person close to Hicks”, again speaking on condition of anonymity: “He’s not in the market to sell, but he’s in the market to buy more shares.”
In reality Hicks wants control and DIC want control. Neither want the next phase in Liverpool’s ownership to be on a fifty-fifty basis, but the suggestion DIC would not buy at fifty-fifty is believed to be slightly wide of the mark. They don’t want to be minority shareholders, but once on board as joint owners, DIC would have new ways of putting pressure onto Hicks to sell part of his interest. Hicks is known to have been in discussions with DIC, which pours a certain amount of cold water on the denials he has about wanting to sell.
Unless Hicks’ secret plans include bringing in a third party who would allow the debt owed to the banks to be reduced, investing their own money rather than money borrowed at high interest rates, Hicks isn’t likely to be a popular figure at Anfield again. To refuse the involvement of DIC, who could allow Liverpool to become stronger on the field rather than weaker – as is likely under the current conditions – would show that personal pride and image is more important to Hicks than the club he once pretended to care about.