Why leveraged takeovers are bad for football
It’s a sorry day for football when those who want to consider the game’s future feel like they need to go to Business School to understand what the hell is going on. But Liverpool fans seem to have been blindsided by the deleterious consequences of their club being the subject of a leveraged takeover, that is, one financed by borrowed funds, despite the fact there was a similar example not sixty miles away in Manchester not long ago.
Some, though, still argue such debt-laden purchases should be allowed in football. The Guardian’s “Big Debate” this week featured for and against viewpoints on the issue.
On the for side was Joe McLean, Partner of accountancy and advisory for Grant Thornton. I won’t mention that he or a tired Guardian sub thinks Liverpool are owned by “George Hicks and Tom Gillett”, but I will inflict on you some of his puerile reasoning for why leveraged buy-outs should be allowed.
Through telephones and the internet, fans can get the kind of access they couldn’t 10 years ago and the Glazers will think they can exploit that technology. Almost half the population of the world is in India and China and that is the market that attracted the Glazers, George Hicks and Tom Gillett at Liverpool, and other big investors.
Well, that’s fascinating, Joe. There’s a big worldwide market out there for football, there’s lots of people in Asia, and some of them even have telephones! Fantastic. If only the Glazers had told us that in the first place!
No, that’s a reason why people would borrow money to buy a club — speculative dreams of the unbounded riches to be made in the Asian market (if only one in ten Chinese would buy my wind-up clock…) has been sending folks east for centuries. Even if they’re right this time and they pull it off enough to keep paying those mountains of interest payments, where’s the benefit for the existing fans?
But McLean reassures us these speculators know their stuff, ignoring the fact United had to have an extremely successful season just to pay down the debt this year, have raised ticket prices, and that in football, fortune is always eventually fickle.
The Glazer family know what they are doing. They say: “We will borrow money, take the club to another level, pay the money back and make a capital gain.” I think that is quite legitimate in world business. It’s what happens in the City, Frankfurt, Geneva and New York. They borrow, take the business on, pay it back and make a profit. Sometimes it goes wrong but often it goes right. The Glazers have taken United forward and Sir Alex Ferguson continues to be a big spender in the transfer market. The profits United are making means they are servicing their debts and that shows the Glazers’ example is working.
Joe, no-one’s saying this isn’t something that happens in world business. That doesn’t mean it’s right for football, and the reason is in that little caveat he slips in there in the middle of the paragraph, which I’ve kindly bolded and italicised for you: “Sometimes it goes wrong”. Notice he doesn’t say ‘rarely’ or even ‘occasionally’. There’s absolutely no reason for the risk of something going wrong to be put onto the club and onto the fans who will pay the price.
McLean’s only argument in favour of leveraged buy-outs is that they happen in business, and there’s a decent chance those behind it will make a profit out of it in a few years, in the meantime using the club’s money — the fan’s money, at bottom — to pay off the interest. Not a word of how it’s in any way good for football.
The ‘no’ portion of the debate is argued by Dave Boyle, head of policy at Supporters Direct (it should be noted that Dave is an occasional Pitch Invasion contributer).
Boyle makes the point I just tried to rather more eloquently.
The idea of a leveraged takeover is that an asset is undervalued and somebody thinks they can make more money out of it so they use debt to acquire the club and then try to make the money back. It’s based on speculation, so the only sure-fire winners tend to be the people who sell up and leave the clubs behind.
Once the debt has been taken on you are at the whim of capital markets and that means the size of the liability can be beyond the club’s control . . .Debt can help achieve new goals but if the only reason is to transfer ownership from one party to another, then the question of most fans would be “Why are we doing this?” It seems like if you have this kind of debt you have to make more money just to stand still.
But even more importantly, Boyle offers a tentative way forward. After all, if McLean’s point is leveraged buy-outs are normal business practice, and our contention is we don’t want them in football, then the solution must involve protecting football to some degree.
Why not introduce a more rigorous process of scrutiny, more detailed financial investigations via a regulatory unit ensuring that owners show they have the money, what the source of the money is, the viability of their business plan and how much debt is involved. Clubs will continue to be taken over and go into debt but at the moment it’s a free-for-all. If there is a recession, consumer spending will drop and season tickets and TV subscriptions could be the first things to go. But the borrowing is based on the belief that the boom will never end.
It remains a cutting and cruel irony that the kind of free-for-all unregulated takeovers going on in English football are being led by Americans who also own sports teams in their own countries in leagues that would never allow this kind of unstable investment without far more severe scrutiny. That’s why they’re in England trying to make a quick killing, and Hicks is saying silly things like this.