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It’s a funny old game

2010 October 17
by Paul Vallely

It’s a funny old game, capitalism, to borrow a footballing cliché from my colleagues on the red-top tabloids. The sale of Liverpool Football Club came off the sport pages with good effect in recent days. For it was not just a rollicking boardroom soap opera. It also raised some wider moral questions about the acceptable and unacceptable aspects of the laissez-faire economics which has been the default in Britain ever since Margaret Thatcher declared that there is no alternative. Obviously she had never heard of 4-5-1.

Leveraged buy-outs were a key part of the blowing up of the global financial bubble which has now been pricked with such devastating international consequences. An LBO, in layman’s terms, means borrowing-to-buy. And how. These complex financial instruments rarely struggle off the financial pages but football has hurled them into the general spotlight – where they turn out to be pretty dubious devices.

LBOs took off in the 1980s when a firm would buy another by putting up just 10 per cent of the price and borrowing the rest. The resulting investments were known, for obvious reasons, as junk bonds. They went a bit out of fashion in the 1990s but boomed again in the last decade. The amounts borrowed rose, in the United States alone, from $30bn in 2001 to over $450bn just before the crash. One of those who made a fortune from leveraged buy-outs in the boom years was a buccaneering Texan named Tom Hicks.

Hicks is one of the two Americans who has just been forced to sell Liverpool, the club at which he arrived promising he would not  “do a Glazer” – and then did exactly what the Florida-based Glazer family had engineered down the M62 at Manchester United.

Defenders of the leveraged buy-out say it is pretty much what most of us do when we buy a house. In the good old days you put down a deposit of £20,000 on a £200,000 house. Then, after a decade of rising house prices, you sold the place for £300,000, pay off the balance on the mortgage, and walked away with £120,000 profit to put down on a bigger house.

Let’s leave a side the impact this had on house prices, which were pushed up to the point where young people now can’t get their foot of the first rung of the housing ladder. What makes the LBO different is that the buyer is then allowed, through fancy legal footwork, to transfer the debt from himself to the company he has bought. Nifty or what?

This meant the family of so-called billionaires who took over the richest club in the world saddled a previously debt-free Man Utd with £716.6m of loans. Large sections of the club’s profits now go to repaying the interest on the money borrowed by the Glazers who have, over five years, extracted £400m from the club in interest and fees and put not a penny in. The result is that a club with annual earnings of £286m has just declared a £84m loss. Tom Hicks, and his co-owner, did something similar at Liverpool.

That is not all. These financial whizzes don’t just borrow money on their own account. They set up subsidiary shell companies which reduce their liability, and increase the borrowing ratio even more, with complex financial instruments with names like mezzanine borrowing, payable-in-kind toggles, and covenant-light debt. They then set all operating profits against the high interest payments to avoid paying UK taxes. Many leveraged companies often pay no corporate taxes. Some even get tax refunds. In Germany the government has changed the tax rules to discourage leveraged buy-outs.

Apologists for the system defend it in the wider business world by saying that it can promote economies of scale. So when the US multinational Kraft bought out Cadbury last year – using leveraged cash borrowed from RBS, a bank ironically owned by the British taxpayer – it ought, in theory, to have been able to buy its cocoa more cheaply.

But football clubs are different from manufacturing companies. They are something in which individuals and a community invest loyalty and identity.  When Liverpool fans campaigning against Hicks named their group Spirit of Shankly they were implicitly demanding a return to a different set of values which were embodied in the persona of the club’s most legendary manager.

They are also rooted in a geographical place. Football fans do not switch their support from Liverpool to West Brom because they are playing better, or have cheaper season tickets, as they might switch from Tesco to Morrissons on grounds of price. In a world where England’s football teams are global brands it is conceivable that a supporter in Bangkok might do that. But the largest component of most clubs’ revenue, even with lucrative TV deals, comes from matchday receipts at the home ground. Even more so since carpetbaggers like the Glazers have pushed ticket prices up by 40 per cent in just five years.

It seems pretty clear, to quote Martin Broughton, the chairman of Liverpool who sold the club last week in the teeth of the opposition of Tom Hicks: “If you are leveraged, that’s bad for a football club.”  The case for an outright ban on leveraged buy-outs by the English football authorities is overwhelming. The silence of the Football Association and the Premier League on all these governance matters in recent months has been downright embarrassing.

As elsewhere in the financial world the deregulated model of vampire capitalism has palpably failed. If the authorities had any regard for the long-term future of the game they would be asking other questions too about where improved regulations might help. Sugar daddy owners at Chelsea, and now Man City, in their attempts to buy swift success, may add to short-term excitement in the game. But the high prices they pay for top international talent puts immense financial pressures on smaller clubs that have to try to compete – which is why the Premier League saw one of its clubs, Portsmouth, go bust for the first time a few months back. The inflated transfer fees and player wages have trickled down the Football League to Championship clubs desperate to win promotion to the Premiership.

Just as greater regulation of international capital markets and banks is needed by world politicians so it ought to be in the microcosm which is national football. The financial fair-play initiative, by the European football authority, Uefa, which should come in by 2012-13, will require clubs not to spend more on players than their annual income will sustain – though many fear they will not have the nerve to enforce European bans on clubs like Man City and Chelsea if they fail to comply. There are other models to explore, like the American football model of salary caps, the German system which requires majority ownership by fans, or the membership models of Barcelona or Real Madrid – though without the Peronist presidential voting which ramps up populist promises and hidden debts.

“At a football club, there’s a holy trinity – the players, the manager and the supporters,” the great Bill Shankly famously said. “Directors don’t come into it. They are only there to sign the cheques.”  How times change. The saga of Liverpool is an allegory for a bankruptcy which extends much wider than the nation’s football pitches.

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