Liverpool FC’s early financial projections and the January transfer window

Profit (loss) on sale of players: The profit generated by the sales of Shelvey and Spearing reduced the losses suffered on the sales of Carroll and Downing. It is with noting that LFC had written down £8.9M in the financial year 2011/2012 as shown in the accounts. Those were classified as impairment charge in players’ registration. Thus, if that charge was related to the 2011 purchase fees of Carroll and/or Downing then the book value of those players would have been reduced thus increasing the profit on their subsequent sale.

Projections 2013/14:

Earnings before tax and depreciation are projected to show an increase of £34.6M from 2012/13 based on the above assumptions. Most assumptions were outlined to help readers with better insight to use their own numbers to arrive at more accurate projections.

Most fans are interested in one thing; how would this affect the club’s capability in the transfer market?

The answer is not straightforward. The mythical “net spend” figure is largely irrelevant .The driving determining factors are the UEFA’s Financial Fair Play (FFP) and the Football League new financial regulations. To explain those briefly, few principles will be outlined below in the part written by Ed Thompson the author and editor of the Financial Fair Play blog.

Liverpool FC and FFP

For LFC to be able to qualify for a UEFA competition in 2014/2015 season (Champions League or Europa) it has to come fairly close to breaking even over the two football seasons 2011/2012 and 2012/2013. The club cannot incur cumulative losses of more than €45M (£37.7M) in those two years and the owners will have to inject equity for an equivalent amount to cumulative losses above €5M (£4.2M) over those two years.

LFC has incurred £40.5M loss in 2011/2012 and have not released its financial results for 2012/13 which were projected to be a pre-tax loss of around £28M. The cumulative loss is thus around £68.5M (i.e. well above UEFA’s permitted £37.7M). However, owing to a number of permitted exclusions, Liverpool will still pass the FFP Break Even test. Youth and community spending is excluded, as is any spending on financing stadium development as well as goodwill amortization.

As some of these figures aren’t shown separately in the statutory accounts, we have to rely on some educated guesswork. Other analysts have assumed around £10M a season for youth and community spend plus £3m a season for infrastructure financing – working on these ‘markers’, the club would report a Break Even Deficit of £40.6M. Even with a Break Even Deficit of £40.6M, LFC would still pass the FFP test. If losses are trending in the right direction (as Liverpool’s are), UEFA permit clubs to deduct the cost of wages paid in 2011/12 to players on pre June 2010 contracts. In Liverpool’s case this will easily be enough to push the Break Even Deficit below £37.7m. Those pre June 2010 players included in these calculations were Pepe Reina, Glen Johnson, Jamie Carragher, Daniel Agger, Martin Skrtel, Lucas Leiva, Dirk Kuyt, Steven Gerrard and Maxi Rodriguez.

FFP requires equity injection by owners to cover any losses above €5M (£4.2M) over the two seasons, thus owners will need to inject around £36.4M to cover those losses by the end of 2013. However, that should not pose a real problem for FSG. Based on post balance sheet events outlined in LFC’s 2011/2012 set of accounts, the club has took £69M interest free loan from its parent company: UKSV. We see no reason why that loan cannot be converted in part into equity.

It is worth noting that UEFA’s permitted losses of €45M (£37.7M) and the permitted deviation of €5M (£4.2M) are pro rated. This is relevant in the case of LFC as the club reported its results for 10 months in the 2011/12 financial year. Hence those permitted levels will be both reduced by around 8.3% to £34.6M and £3.85M respectively.LFC will still pass the FFP test based on the foregoing projections and assumptions.

As for the Football League’s new financial regulations, from 13/14 onwards no PL club can increase its wage bill by more than £4M per season. The purpose seems to not allow clubs to fund their wage increases from the new PL TV deal. However, clubs can increase its wage bill beyond the £4M cap from an “increase” in their match day, commercial revenues, non PL media or profit from players’ sale etc.

Final Note

The aforementioned assumptions suggest that LFC would pass the FFP test and the club can ensure its future compliance with FFP by just staying above water and ensuring its profitability does not dip into red.

This conclusion is further strengthened by FSG’s visible and vocal support to the FFP regulations in several instances including supporting Arsenal FC in its letter to the FA Premier League (dated 17th December 2012) to impose an even stricter set or rules on PL clubs in line with UEFA’s FFP.

The implementation of the Football League’s new financial regulations might provide insight into why Pepe Reina had to be loaned given the club’s projected £3.12M increase in wages for this financial year. The club had “maxed out” on its wage bill for this season.

Going forward, LFC cannot increase its wage bill by more than £4M a year unless that increase was funded by a revenue increase from sources other than the PL TV money( referred to as “Club Own Revenue Uplift” by the FA) or from the profitable sale of players. Without European football, I expect departure of few senior players in the summer.

LFC is expected to record a small accounting loss on the sale of players during the summer window and its “Revenue Uplift” is also projected to decline. Based on the above predictions, LFC can afford to sign a new player on £40K per week wages on January 1st 2014 without loaning or selling any of its players. This new player could be signed on £70K pw if the above predictions overestimated the club’s actual wage increase by only £620K per year: a very probable scenario.

In a nutshell, in the likely event that LFC is able to get around the £4M wage cap, I can safely predict that the club can invest around £30M in transfer fees in the upcoming January transfer window.