To sell or not to sell – The China Everbright saga
The recent rumours of an impending bid for Liverpool Football Club (LFC) has been on everyone’s lips of late and in particular on the site. As we continue to anaylise the ongoing saga I thought it would be prudent to try and explain the requirements of any deal and how the process would go, then I started to ponder the whole deal, the whys/who and how of the whole story and realized that this could be a large piece.
I suppose the best place to start would be as to what makes the club a sound purchase on a sporting scale (I make the clear comment on sport as from a business perspective buying clubs rarely make sense). If we just look at Liverpool for what it is, there is no bigger club in the Premier League with the possible exception of UTD. Now folk may point to the rich list and the positions of City, Arsenal and Chelsea but one team has been financially doped to Ben Johnson levels and the other two are in the London area and have all the trappings that brings which include high cost of real estate assets and much higher ticket prices. From a pure commercial aspect we are only beaten by the scum, Madrid and Barcelona. This is despite our continued sabbatical from winning the league.
Very recently the Chinese super league started making waves with incredible amounts of money being spent on bringing it into the public eye. Which they have achieved with massive success, a league that just 3 years ago wasn’t even contemplated all of a sudden started spending insane money on ageing or average players. Now whilst the clubs have to be boosted to pay for these oversees stars it also pushed the league firmly into the limelight. Whereas the MLS has had minor success and is slowing growing as a sport and brand in the country they have been restricted by the salary cap and therefore the ability to really make an impression on the globe. The Chinese has gone the other way and pushed the brand massively. This will inevitably lead to bigger sponsorship deals and even more ‘stars’ looking for a pay day. To keep the momentum of this commercial success they need a vehicle, or in fairness a number of vehicles to really keep the league in the spotlight. Presently Inter Milan, Man City and Auxerre all have Chinese company investment. How long before we start seeing some of our younger stars of the premier league going on loan to China? Commercially it will inevitably happen.
When you take the sheer amount of followers we bring from across the globe and in particular the Asian region then it makes complete sense that the Chinese are looking at our club to act as a vehicle. Especially when you dig deeper into the company that is supposedly interested, China Everbright:
China Everbright Limited is a financial services company in asset management, direct investment, brokerage and investment banking in the Greater China region, including Mainland China and Hong Kong. It is parented by China Everbright Group, a state-owned enterprise operated under the supervision of the State Council of the People’s Republic of China.
China Everbright Holding Company Limited was established in Hong Kong in 1983. It then acquired several listed companies and restructured to form China Everbright Limited (SEHK: 165) and China Everbright International Limited (SEHK: 257). China Everbright Limited was listed on the Hong Kong Stock Exchange in 1997. As of June 2015 it ranked no. 1 of all Chinese companies for net increase in disbursement of loans and advances.
The Company, through its subsidiaries and associates including is brokerage and investment banking arm Everbright Securities, is principally engaged in investment activities and the provision of financial services.
Prior to 2002, Everbright had no asset management department. Mr. Guo You, the CEO at the time set a goal to make Everbright one of China’s premier investment firms. To fast track the asset management business he hired William Lawton as CEO of the new asset management company.
Everbright conducts its business activities in three areas: short-term investments, financial services and long-term investments plus other operations. The Company provides portfolio management services for institutional and individual clients, such as China Everbright Dragon Fund, or its SeaBright China Special Opportunities Fund series of direct investment funds, the first of the series that was launched in 2004 in a joint venture with Seagate Global Advisors, LLC. It provides financial advisory services, such as share placements, mergers and acquisitions (M&A), privatization and project financing. (Source – Wikipedia)
Now as a state backed enterprise they will also invest on behalf of other funds, in this case the predominant investor appears to be CIC which is the sovereign wealth fund. This in fact eases any concern I had about a short term investor coming and seeking dividends which in a sporting institution are difficult to give out when you consider the need for ongoing player investment and the backlash from fans when there is a perception that the owners are taking money. FSG have not taken anything out of the club, as is proven by the accounts each year, and if you look at investment horizons of even short term investors (around 7 years) then they have doubled their investment when they sell. I firmly believe that they will look to hold on until we are back in the Champs League and we are reaping the benefit of the new main stand before they contemplate a full sell out, but if they receive back their investment and also maintain a majority share, they will be considered a major win investment wise.
So commercially, CIC will be looking at boosting other areas of their economy with in real terms is a fairly small layout of capital. The purchase, or part purchase of a club of our stature would almost immediately boost sales in China which is a massive market. There will also be fan switch from the Utd brand to ours which happens in certain regions and should not be seen as an anomaly, as much as we would not do it! This is turn would also assist in many markets across China, partnerships with the League itself, tourism, merchandising of all football material and also the boost to sport in the country. These are all intangible boosts outside of the revenue derived from the club itself. Therefore you can offset any cost in purchasing the club with these business upsides. Essentially running a breakeven model of business and reaping the capital injection back on selling of the club in the future, however long that takes.
The club is presently valued, depending on who you read at anywhere between GBP 800 million to 1.4 billion GBP. Looking at the financials of the last few years, EBITDA (Earnings Before Interest Tax Depreciation Amortization) and the present EBITDA multiples of Merger & Acquisition (M&A) markets then from the outside I would look at something in the region of 800 million. However, when you take into account future growth of TV sponsorship, the fact that we are not yet in the Champions League and this is not a willing seller then the premium inevitably will increase. Depending on how hot the market is will dictate the premium, and right now the market is hot. Therefore any purchase will need to value the company (club) somewhere in between those figures.
In summary, the reasoning behind any Chinese investment is clear, the brand will drive growth in the region and boost the economy in many ways. Only certain clubs could do that immediately, the big clubs of Madrid, Barcelona and the scum. All of which are much more expensive that ours. Despite the great work FSG has done commercially we are still a sleeping giant in many respects when you look at the business models of the other 3. By investing and taking Liverpool back to the Champions League and fighting for the title again it will reap a benefit with commercial revenue and increase in value. Other clubs like Spurs, Leicester, Chelsea or Arsenal just do not have that backing and this is why seeking an investment in Liverpool just makes sense.
From a fan perspective this is a deal that would be beneficial to squad boosting cash. From a business perspective it certainly makes sense from the outside looking in but we do not know what the demands of the buying party will be. These deals are always complicated by various needs from each investor, so I would say that we need to be patient and not to be too upset if it doesn’t happen.
Written by Si Dixon
For clarity, I am not a journalist but rather just a fan of the club who likes to pen the occasional article. My experience in this field is as the Head of Department for global investments for a major Operator/Investor and I have over 2 Billion USD of acquisition experience in infrastructure. The thoughts penned are borne from these experiences and not through any due diligence conducted on my part. So there may be some slight inaccuracies and the article is to be used as a guide onto what is presently occurring. What you believe is up to you!