Avoiding the Drop

Meet the new boss...?

All season long, Liverpool owners Tom Hicks and George Gillett have been harping on one figure: £100 million. That’s the amount that they need to raise in outside investment for their plans to continue. Perhaps not coincidentally, it’s also the amount of money that the Royal Bank of Scotland says Liverpool’s debt needs to be reduced by in order for any favorable refinancing of their loans to occur. The underlying message: with the money, fans get New Anfield and a shot at glory. Without it, well…you do enjoy the Europa League, right?

The problem with that figure is that nobody invests £100 million without expecting a return; anyone spending that money would need to know exactly what percentage of Liverpool’s ownership that cash would get them. Back in November, Merrill Lynch was trying to shop a 25% stake in Liverpool for that £100 million; that would see both Hicks and Gillett (who would retain a 37.5% stake) retain their ownership of the club.

That would be a best-case scenario for the two Americans (if not the club): retain a majority stake in the club while at the same time receiving a cash injection to pay down the debts. In theory, this could also free up capital to build the highly-theoretical 60,000 seat stadium the club needs to be financially viable in the long term.

On Saturday, the Americans received part of their wish: the Rhône Group, a New York based private equity firm with branches in London and Paris, submitted a bid of £118 million to the Liverpool board. The half  of their wish that didn’t come true: the Rhône Group wants a 40% ownership stake, which would reduce Hicks and Gillett to 30% apiece. In other words, the Rhône Group would own Liverpool.

This opportunity is a mixed bag. Right up front, the biggest problem is valuation: Rhône is valuing the club’s total worth at £275 million, not the £400 million Hicks and Gillett think it’s worth. There’s probably some wiggle room in there, of course (perhaps Rhône would settle for a 34% stake, for instance), but it’s not much and it’s almost certainly entirely dependent upon Hicks and Gillett being removed as managers.

While that’s what Liverpool fans have been clamoring for, it doesn’t mean that it’s a complete and total success; very little is known about Rhône, and it’s quite possible that “investment” means to put money in just to make money back by selling off players or raising ticket prices. One reassuring sign: the £118 million Rhône is planning on paying into the club would be a direct cash injection, and would not go to either Hicks or Gillett. That means that it would go almost entirely towards servicing debts (which are somewhere around £300 million); the ripple effect could very much mean that Liverpool will have more money to play with in the transfer market, as debt payments are lowered.

That’s really the question: what do the Rhône group intend to do with the club? This isn’t a privately wealthy individual looking for a vanity project; nor is it a family coming over looking to make money. This is an investment firm that, ultimately, needs to pay back their clients; they can do that by having a successful team, or they can do that by selling players. Money’s money in that case.

One possibility, however, is that Rhône is looking at an “in and out” strategy. Liverpool, not including debt, was valued at £605 million; reducing their huge debt by a third could make the 40% ownership share more valuable than the £118 million spent on it. In that sense, this could be a fantastic move for all involved: Hicks and Gillett could make their profit, the fans could have a new owner attracted, and Rhône makes a tidy profit.

Christian Purslow has said that this is one of six or seven different offers; the owners want all of this done by Easter. Since Liverpool appear to be giving up European football for Lent this year, there’s no time like now to buy low; hopefully, next season all involved will be able to sell high and let Liverpool actually make some moves. Like, I don’t know…signing Juan Manuel Vargas from Fiorentina.

Liverpool FC handles bid from private equity player [AltAssets]
Liverpool to open talks with Rhône Group over sale of 40% stake [The Guardian]
Soccer Team Valuations [Forbes]