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Aug 17, 2010

Going for broke?

An initial wave of optimism regarding prospects of a takeover at Liverpool has now been tempered by the growing realisation that a change of regime will not be completed before the close of the summer transfer window. While the board examine the range of bids put forward to the club, Soccernet has uncovered a number of details that expose the depth of the financial problems at Anfield.

According to information supplied by owners George Gillett and Tom Hicks to would-be buyers, Liverpool, struggling under a mountain of debt, are in danger of financial implosion if the club is not sold soon.

In recent days, the Liverpool board has emphasised that they will not be rushed into a deal to sell the club. However, the clock is ticking down towards an October 6 deadline when the owners' latest bank-loan extension runs out.

Soccernet has discovered the true depth of the financial crisis, as documented by Gillett and Hicks to prospective new owners. The deepening Anfield financial malaise illustrates the degree of difficulty chairman Martin Broughton has to overcome to save the club and find a suitable and credible new owner.

There is not yet panic in the boardroom, but the numbers show that only a sale can put the club's finances back on a stable footing. The latest accounts, to July 31 2010, have yet to be published but the expectation is that club earnings are unable to cover interest payments of more than £40 million.

Yet if you strip out the debt, the financial performance of the club is improving strongly. Liverpool FC still has huge income from the central Premier League funds via television revenue and Barclays sponsorship, plus their own commercial revenues and matchday incomes. Managing director Christian Purslow and his team have boosted commercial revenues significantly - albeit from a low base - through deals like a new shirt sponsorship by Standard Chartered. However, the numbers will show that the profits are increasingly being absorbed by interest repayments.

Liverpool's most recently published accounts, for the financial year to July 31 2009, showed the Reds' earnings swallowed up by interest repayments of £40 million, resulting in a reported loss of almost £53 million. For the year just completed, the expectation, Soccernet understands, is that the figures will be even worse. Despite increased commercial revenues and virtually no net transfer spending, debt interest payments have heavily burdened the club.

The Liverpool board has emphasised that they will not be rushed into a deal to sell the club but sources have highlighted just how parlous the financial situation has now become. The financial facts of life at Anfield add up to a crisis that is rapidly coming to a head.

There is little to no prospect of Liverpool emerging from the red unless they find a new investor. Club accountants KPMG have already warned about Liverpool's finances. As things stand, it is inconceivable that KPMG's warning of "the existence of material uncertainly that may case doubt on the group and parent company's ability to continue as a going concern" would not be repeated in the 2009-10 accounts.

There are dire consequences of going into the red. The nightmare scenario is that administration, however unpalatable, becomes one of the options, though it is understood that this is not yet on the cards.

So how did Liverpool get into this mess?

The issue goes back to the way in which the club has been run over the last couple of decades. Galling as it is for fans to acknowledge, the success of Manchester United on the pitch in the Premier League era has gone hand in hand with a slick commercial operation that left Liverpool far behind. By a mixture of luck (United was nearly sold in the early 1990s) and judgement, United's commercial management has grown revenues and profits to the point where they are able to sustain far higher levels of debt than Liverpool.

For almost two decades, previous Liverpool owner David Moores struggled to bankroll the heavy net transfer spending of successive managers. When Moores realised that he no longer had the resources to keep backing the club, a long search for new owners began. Whatever the reason for choosing the Americans in 2007 - a decision that he now seems to regret - Moores placed Liverpool in the hands of men who bought the club with debt.

"Liverpool's is not a long-term business model," Philip Long of accountant PKF told the Telegraph recently. "There simply is not a happy ending to leveraged buy-outs. The burden of the interest outweighs any profits the club make, and that becomes unmanageable."

All of which begs the question: why would anyone now want to buy Liverpool at all?

The carrot being dangled by Hicks and Gillett is the prospect that revenues - and profits - will double once a new £400 million stadium is built. If this scenario were to become reality, Liverpool could become one of the richest clubs in the world, with revenues heading towards £400 million (up from £185 million in 2008-09) and profits breaking through the £100 million barrier.

However, given the response of potential buyers to date, it seems that such forecasts are deemed somewhat over-optimistic. What is sure is that they have yet to convince anyone to put a knockout bid on the table.

What is even clearer is that Liverpool cannot sustain the current level of debt and interest repayments. The deadline for repaying the £237 million debt to Royal Bank of Scotland has again been extended, but now expires on October 6. The price of this extension is a whopping £60 million in penalty fees (currently averaging £2.5 million a week). Crucially, these additional fees fall on the owners, rather than the club.

However, the spiralling costs make it harder to see how Messrs Hicks and Gillett can hope to walk away from Liverpool while breaking even, never mind with the massive profits they have talked of. If a sale does not look likely, some cold, hard decisions will have to be made about the future of Liverpool FC, in the run up to the October financing deadline.

The most unpalatable option for the club and its bankers would be a move into administration. The subsequent automatic nine-point deduction would probably kill any chance of qualifying for the Champions League again next season, further damaging Liverpool's short-term financial prospects.

Sources insist that administration is not currently on the cards. And the club's main bankers, RBS, are working hard alongside management to ensure that it doesn't happen. However, it is an option that no one can rule out completely.

So, right now, how much is Liverpool actually worth?

Hicks initially claimed it would fetch £600-£800 million but in the last few weeks all interested investors - bar one - have suggested they would be prepared to pay little more than half that amount at best. Moreover, so far none of the declared interested parties have satisfactorily shown proof of funds or indeed have declared the identity of their investors.

These are key requirements; sources have stressed that the number one priority of those conducting the sale process is to avoid doing the wrong deal and repeating the mistakes of last time round. Without having clear, unequivocal answers to these questions, how can anyone be endorsed as a suitable owner for the club?

Expectations of a quick takeover have fallen by the wayside. Once again it is becoming a drawn-out and painfully slow process without any sign, as yet, of a resolution.

Chairman Martin Broughton has a mandate to find the best solution for the good of the club, rather than the best price for the owners. As it stands, perhaps prospective bidders will play for time, holding out for the prospect of a knock-down price, should RBS be forced into assuming control of the club after removing Hicks and Gillett. It all points to yet more weeks of uncertainty at Anfield.

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