HomeFeatured ArticlesLiverpool Will Chart New Course With £150m Spending Spree

Liverpool Will Chart New Course With £150m Spending Spree

In my last piece, I made a case for Liverpool Football Club’s American owner, Fenway Sports Group (FSG). I believe that they’ve been good, solid owners who have taken a long-term view towards the revival of this proud, once hugely successful club. A lot of people underestimate just how precariously close the club was to going under when they took over in 2010. In Spain, they talk about how Barcelona and Real Madrid do not worry about carrying the huge amount of debt that they do because they are confident that they will always be bailed out in case of a crisis. The local governments, communities and even the banks will aid them come what may. When Liverpool plumbed the depths in 2010, there were only two serious offers for the club. There wouldn’t be any bailout orchestrated locally, the government wouldn’t get involved and the bank, in this case, RBS, wouldn’t play ball. They famously classed the Liverpool loan as a ‘toxic’ asset. In fact, Liverpool weren’t an attractive proposition to a lot of people at the time, and for the vast majority of fans who experienced that situation, I am sure they never want to go through something like that again. Once bitten, twice shy, they know that there’s no safety net. Yes, we have our history but in this era, we’re no Barcelona, Real Madrid, or even Bayern Munich.

So, there is a lot to be thankful for when it comes to FSG’s reign. Have they been perfect? Absolutely not. For a club that believes in buying players young and developing them in a manner that demonstrates value both on the pitch and in the transfer market, they haven’t done too well on that front. A lot of that failure could be down to going through four managers and three directors overseeing transfers in these seven years, each having a different approach to buying players, but the scouting network in place should take a good amount of blame, and by extension, the owners.

A deeper look at the finances over these seven years reveal the story about how FSG have approached transfers while attempting to improve the short and long-term future of the club. Since we are all interested in what should be expected in terms of transfers before the new season starts in August, I shall try and wager a guess at what could happen.

Let us begin by looking at how much Liverpool have spent on transfers, before FSG took over and after. In the 5 years leading up to 2010, Liverpool’s net transfer spend (the difference between the cost of purchases and those sold) was about £10m a season. In the six seasons under FSG, that has tripled to £30m a season.

Only three clubs have a higher net spend than Liverpool over the last 5 years. Both Manchester clubs comfortably outstrip Liverpool by around 3 times, with the net spend being close to £100m a season while Arsenal spend around £40m. There is a lot of admiration for how Daniel Levy runs Tottenham and a big reason is that they have managed to do so well with an average net spend below £5m in recent years. They are a great example of how one does not necessarily need to spend a lot of money to be successful. One would have noticed that Chelsea have reduced their net spend in recent years, and understanding the finances at these clubs provide a lot of inputs into factors that contribute to decisions on recruitment budgets.

Let us look at the Profit and Loss statement at Liverpool over the last three reported seasons. Liverpool had record revenues for 2015-16, breaching the £300m mark for the first time. However, what people sometimes tend to overlook is that in itself, that means nothing. There are expenses accrued when a football club is run and Liverpool made a loss that year of £19.8m.

The worrying aspect for me was the reduction in Earnings before Interest, Tax, Depreciation and Amortization (EBITDA). Essentially, this measure tells us how profitable the club is without factoring in financing and accounting decisions or tax environments. There are ways in which certain decisions can make the numbers look a lot better or worse than they are, and the EBITDA is a more accurate reflection of how the club has done.

Liverpool had done well in improving their EBITDA over the last few years, increasing it from £10m in 2010-11 to £75m by 2014-15. However, it fell to £37.9m in 2015-16, with an increase of wages by over £40m from the previous year and slower revenue growth being the reason.

To put things in perspective, Manchester United’s EBITDA for 2015-16 was £192m. It was £109m for Manchester City and £82m for Arsenal.

What was worrying was that this was a season in which Liverpool had reached two finals in cup competitions, one in Europe. The additional broadcast income was offset by the poor performance in the league, where we were placed eighth. Commercial income actually reduced from the previous year, and this is where Liverpool’s rivals are stretching the gap in EBITDAs over us. I expect the EBITDA for 2016-17 to be higher when the numbers are reported next year, given that Liverpool will earn nearly £60m more in Premier League broadcast income from the previous year, having placed fourth. And additional matchday revenue of around £20m will come from the expanded Main Stand which opened this season.

Of course, there was no income from Europe and the importance of getting through that Champions League qualification tie in August cannot be overstated. Liverpool has lost out on additional revenue of around £30-40m for every season they have not been in that competition.

EBITDA is a good determinant of how much a club will spend in the transfer windows and it is not surprising that Liverpool had a negative net spend of £4m last year. I am sure that Klopp was told that he could get a few players but he could not attract the ones that he wanted, without having Champions League football to offer. The focus was on offloading players, possibly at a profit, but Liverpool have been terrible at it in recent years with three years of consecutive losses on sales from 2012 to 2014. The Suarez and Sterling sales were profitable in 2015 and 2016 respectively, but they have been the exception to the rule.

Another obvious determinant of how much a club will spend is the amount of cash they have in hand. The 2015-16 accounts show that Liverpool have £8m available. Manchester United have £229m, Arsenal have £226.5m, Manchester City have £55m and Chelsea have £27m.

Liverpool cannot be accused of hoarding cash. They do not generate enough to do that anyway. Manchester United and Arsenal have a lot of debt and while that explains why they have cash in reserve, it also allows them access to cash for completing transfers. Liverpool’s debt saw an increase in 2015-16, with fresh funding required for the stadium expansion. If Liverpool are to spend a substantial amount of money this transfer window, expect that number to go up.

Liverpool have increased their transfer spend in recent years and this is borne out by the following numbers. Player amortization at the club has increased by more than 50% in the last three years, which indicates that Liverpool are paying more in transfer fees.

When a club buys a player, they do not show the full transfer fee in the accounts for that year, but writes down the cost evenly over the length of the player’s contract. For example, if Liverpool paid £35 million for a new player on a five-year contract, the annual expense would be £7 million (£35 million divided by 5 years) in player amortisation.

And when that player is sold, the club reports the profit or loss as the agreed upon selling price minus the remaining value in the accounts. In the same example, if the player were to be sold two years later for £45 million, the cash profit would be £10 million, but the accounting profit would be higher at £24 million as the club would have already booked £14 million of amortisation for the two years he spent at the club.

Liverpool have also shown £28m in impairment charges over the last five seasons. This happens when a club assess a player’s sell on fee to be lower than his value in the books. About £20m of this was in the 2011-12 and 2012-13 seasons, and the club has improved on this in the last three years meaning recruitment has been shrewder.

To summarise, I expect record EBITDA for Liverpool when the annual report for 2015-16 is released next year, though it will not be a lot more than the £75m earned in 2014-15.  This may not translate to overall profits though given that we did not make much from player sales, unlike the two previous years.

Liverpool’s debt has increased while cash in hand remains negligible. Wages have gone up to 69% of revenue, which is the highest of all the top six clubs. And player amortisation has increased substantially which means that Liverpool pay more in transfer fees these days.

What does all this mean for the current transfer window?

What struck me most about Mohamed Salah’s £34.3m move from Roma, excluding a potential add-on of £4m, wasn’t the price. It was the salary agreed upon and duration of the contract. £90,000 a week for 5 years.

At a club where Coutinho is the highest paid at a seemingly low £150,000 a week by today’s standards, overall wages are still high, and Liverpool will continue to buy players whose transfer fees might be high but whose salaries will be around the £100,000 mark. The duration of the contracts will also be reflective of the transfer money paid and the salary agreed upon, with the transfer price amortised over the years agreed upon.

Given my projection of record EBITDA, I expect Liverpool to spend more than the £117m spent in 2014-15. I would be very surprised if this number were around the £200m that everyone is talking about. In reality, it might be closer to £150m. When people talk about getting both Naby Keita and Virgil Van Dijk, who are valued at around £70m by their clubs, it is worth remembering that NO club in history has ever paid that amount of money for two players in one season. One of them might still make their way to Liverpool, but for both to arrive, Liverpool need to make a substantial profit from their sales.

And who is there to sell that could attract good prices? Daniel Sturridge and Mamadou Sakho are the only ones who could command a fee around the £25-30m mark. Alberto Moreno and Lucas Leiva will leave this summer for around £15m and £5mn respectively but it doesn’t look like there is a lot of money from sales heading our way.

Which is why it is important for Liverpool to negotiate hard with their purchases. It is generally thought that the club were gently chiding supporters with their Twitter announcement of Salah. If Liverpool had given into their supporter’s pleas and accepted Roma’s initial demand for £43mn, that would have resulted in an additional payment of almost £10mn over what was eventually paid. Liverpool would do well to follow the same approach with everyone coming in (and going out) this summer. Prolonged negotiations aren’t a bad thing.

It has been a chicken and egg kind of situation so far at Liverpool. Should success follow spending or spending follow success? The owners will be moving into uncharted areas by gambling on future earnings if they spend £150mn this year.

So, there we go, my guess is that we still have another £100mn to spend this year. Who’s next?

Abdul Rahim
Abdul Rahimhttps://flyinggoalie.com
Football Writer. I chronicle the growth of football in India at my blog, Flying Goalie.
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3 COMMENTS

  1. Good article, I’m not surprised with the losses as we are still playing Sturridge a wage when he gets injured and I’m sure Benteke and Carroll were demanding huge wages eventhough they didn’t fit the Liverpool football strategy. If Liverpool want to turn things around they should follow Tottenham’s wage structure, it definitely works but it takes times which unfortunately Liverpool supporters don’t seem to want to do.

  2. Last year showed Klopp’s class when he did not spend all the money that was potentially available as he couldn’t get the players he wanted that would improve us long term. Too often in past we have bought badly because the money was there.
    LFC fans should focus on the figures in the article about how much CASH Arsenal and both Manchester clubs have available to spend. Stop expecting FSG to invest more of their money on player transfers, FFP simply does not allow for what many LFC fans desire.
    LFC fans also need to stop expecting all areas of the team and squad that they believe need strengthening to be addressed every transfer window.
    Some LFC fans on the official website still think the club should buy Salah, Keita, Mendy, Oxlade-Chamberlain, Van Dijk and Mbappe this summer, plus a new keeper. Pure fantasy football

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