Liverpool FC - 2023/24 CF Statement and Debt Estimates
Initial 2023/24 Financial Estimates: Part 3 of 3
Welcome to the final entry of this series providing estimates for Liverpool’s 2023/24 financials.
As a quick recap of content thus far:
Part 1 centered on the profit/(loss) statement and estimated revenue of £585.9m (YOY: -£7.9m), adj EBITDA of £98.5m (YOY: +£14.8m), and a pre-tax loss of £31.7m (-£22.7m) in 2023/24.
Part 2 focused on fixed asset investment and estimated a net player spend of £162.6m and net infrastructure spend of £48.0m.
Building on estimates provided in the prior two entries, this post will estimate LFC’s 2023/24 cash flow statement and key debt metrics as of 31 May 2024.
As always for entries providing estimates and/or projections, the standard disclaimer applies that figures put forth are (i) developed based on judgments and assumptions and (ii) subject to change based on new information. This note is particularly important for this entry.
Cash Flow and Debt Estimates
Liverpool’s 2023/24 cash flow estimates are summarized below, which project a club-record cash investment outlay financed primarily by external investment into the club:
Operating cash inflow of £87.5m, representing an estimated increase of £2.7m (3.2%) versus 2022/23.
Investing cash outflow of £22.7.8m, comprised of a net cash outlay of £179.8m for player registrations and £48.0m for capex.
Financing cash inflow of £140.3m, reflecting an estimated £150.0m received via the sale of a small stake in the club to Dynasty Equity in Sep ’23 and net borrowing paydown of £9.7m (bank loans: +£15.3m; owner loans: -£25.0m).
For simplicity, the analysis assumes cash balances are unchanged year-over-year (YOY).
Note that due to lack of club disclosure or precise reporting, the estimated size of external investment and assumed use of funds is highly speculative.
With respect to YOY changes in debt, I have estimated:
Net financial debt decreased from £194.0m to £184.3m (-£9.7m; -4.9%; as reflected in CF estimates).
Net transfer debt decreased from £45.8m to £28.6m (-£17.2m; -37.7%).
The resulting football net debt estimate is £212.9m as of end-2023/24, representing a £26.9m YOY decrease.
Content that follows discusses the basis for estimates.
Cash Flow from Operations (CFO)
Cash frow from operations is a critical metric that assesses the strength (or lack thereof) of core business activities and provides insight into organic capacity to fund investment, repay obligations, etc.
Liverpool historically generates relatively strong CFO by industry standards that, covid-impacted-seasons aside, tends to be in proximity to the club’s adj EBITDA.
The general alignment between the measures reflects the net impact due to (i) a modest working capital benefit (2013-2023 average: £4.7m), (ii) low net cash interest payments (2013-2023 average: £2.6m), (iii) modest and infrequent exceptional cash expenses (2013-2023 average: £1.7m; non since 2015/16), and (iv) no meaningful tax payments.
For 2023/24, I’ve estimated CFO of £87.5m that is in line with club norms but exhibits a slightly larger-than-normal difference from adj EBITDA (-£11.0m) due to estimated exceptional cash expenses of £10.0m discussed in Part 1. Note that the CFO estimate assumes a £5.0m working capital benefit (in line with recent-historical), net cash interest payments of £6.0m (cited in Part 1), and no tax payments or receipts (in line with recent-historical).
Cash Flow from Investing (CFI) - Capital Expenditure
Liverpool’s capital expenditure (capex) tends to closely track tangible fixed asset investment by cost each year, reflecting low impact from trade financing for this investment segment.
Based on this relationship, it is reasonable to assume cash payments for infrastructure in 2023/24 were in line with costs incurred, which I estimated to be £48.0m in Part 2 (ARE: £30.0m; Melwood buyback: £13.0m; maintenance: £5.0m).
The estimates for CFO (£87.5m inflow) and capex (£48.0m outflow) yield a CFO less capex estimate of £39.5m, which would entail a £4.6m (13.0%) increase over 2022/23 but would be notably below the 2018-2023 average of £59.8m.
Cash Flow from Investment (CFI) - Player Registrations
While Liverpool’s cash outlay for infrastructure generally approximates cost, the relationship is very different for investment related to player registrations due to the impact of transfer installments. Note that cash spend tends be the far more stable measure, with the standard deviation (a measure of variability) for net spend 2.9x greater than cash net spend from 2013-2024 and 4.1x greater when shortening the look-back to 2018-2023.
Due to the historical lack of alignment between cost and cash spend for this segment, I developed net cash spend estimates based on the following assumptions:
· Cash payments related to pre-2023/24 signings of £74.9m, reflecting transfer payables due within 12-months as of end-2022/23 per club accounts.
Cash payments of £161.1m for in-period activity, representing the aggregate of up-front payments for acquisitions, agents’ fees for acquisitions and contract modifications, payments for crystallized add-ons, and Premier League levy fees.
The notably high in-period outlay is partially driven by the club activating release clauses (full payment up front) to acquire registration rights for two major signings (Szoboszlai and Mac Allister).
Cash receipts related to pre-2023/24 signings of £35.8m, reflecting transfer payables due within 12-months as of end-2022/23 per club accounts.
Cash receipts of £20.4m for in-period activity, representing up-front receipts from sales (net of agents’ fees) and receipts for crystallized add-ons.
As discussed in Part 2, I’ve estimated net fees from sales of £34.0m for the period, largely driven by the summer 2023 player sale profit of £19.3m and estimated aggregate remaining book value for Fabinho and Henderson at time of exit. The assumed proportion received in-period (£20.4m) generally reflects reporting that cited favorable payment terms to LFC (note: precise payment structures not reported).
The resulting 2023/24 cash net spend estimate is £179.8m (payments: £236.0m; receipts: £56.2m), which (i) is £17.2m greater than the net spend estimate of £162.6m developed in Part 2 and (ii) would twice the previous club-high net cash player spend set in 2019/20 (£89.5m).
With CFO less capex estimated to be £39.5m, cash net spend on player registrations of £179.8m would result in a net cash outflow of £140.3m before considering cash flow from financing.
Cash Flow from Financing (CFF)
Liverpool’s liquidity on hand was £77.4m at end-2022/23, comprised of £3.4m in cash reserved and £74.0m in unused capacity under their £200.0m revolving credit facility (RCF).
Based on (i) actual liquidity of £77.4m entering 2023/24 versus (ii) the estimate that CFI outflows exceeded CFO inflows by £140.3m, there was an indicative need for incremental liquidity access during the period.
Per disclosures by the club, that liquidity access occurred via two events. First, the club activated an embedded accordion option on the RCF to increase the limit by £100.0m to £300.0m on 07 June 2023, which served as a liquidity bridge while the club explored external investment into the club. Note that this activation occurred on the same date that Liverpool executed the Melwood buyback per land registry details and the day before the signing of Alexis Mac Allister was announced.
Second, on 28 September 2023, Fenway Sports Group (FSG) announced that sports-specialist private equity firm Dynasty Equity acquired a minority common equity stake in LFC with transaction proceeds to primarily be used to reduce the outstanding balance on the RCF (note: Farol Asset Management indicatively acquired a portion of Dynasty’s stake in Nov ‘23).
Unfortunately, while it was disclosed that financing was received to normalize outstanding debt, there is significant uncertainty as to both (i) the size of the investment, with terms undisclosed and The Athletic reporting an amount “between £82m to £164m,” and (ii) what proportion of (undisclosed) proceeds were applied to RCF paydown.
With that caveat noted, I have (i) utilized the £150.0m transaction value cited by private market data provider PitchBook as the estimated financing inflow and (ii) assumed a £125.0m paydown on the RCF as the ‘primary’ allocation and £25.0m paydown on loans from ownership as the other use of funds.
Integrating the aforementioned assumptions with a projected neutral YOY cash position yields an estimated cash inflow from financing of £140.3m, attributable to an inflow of £150.0m from external investment, net borrowing (inflow) of £15.3m on the RCF, and net paydown (outflow) of £25.0m on owner loans.
Financial Debt
Based on debt-related estimates cited in the CFF discussion, gross financial debt is estimated to decrease by £9.7m to £187.7m (net financial debt: £184.3m), reflecting an estimated increase in bank debt by £15.3m to £141.3m (net bank debt: £137.9m) and decrease in owner loans by £25.0m to £46.4m.
Note that while a modest increase in bank debt is estimated, due to the activation of the accordion the (i) usage on the line is estimated to decrease in percentage terms from 63.0% to 47.1% (net of cash: 61.3% to 46.0%) and (ii) liquidity on hand is estimated to increase from £77.4m to £162.1m.
In terms of estimated leverage at end-2023/24, due to the estimated (i) YOY improvement in adj EBITDA and (ii) debt normalization resulting from the Dynasty investment, relevant ratios are estimated to improve modestly from (already-healthy) levels at end-2022/23.
Transfer Debt
Liverpool’s gross transfer debt was £112.4m at end-2022/23, with £74.9m due in 2023/24 and £37.5m due in 2024/25 or later.
Due to the (i) high proportion of installments coming due in 2023/24 and (ii) Szoboszlai and Mac Allister signings in summer 2023 reportedly requiring full up-front payments, I’ve estimated that gross transfer debt fell by £39.5m (35.1%) to £72.9m, with the current portion decreasing by £32.3m (43.2%) to £42.6m.
I’ve also estimated a YOY decrease for transfer installment receivables, which are projected to decrease by £22.2m (33.3%) to £44.4m (current portion: £3.7m decrease to £32.1m).
Aggregating transfer payables and receivables estimates results in estimated net transfer debt at end-2023/24 of £28.6m (net due in 2024/25: £10.5m), representing a decrease of £17.2m compared to net transfer debt at end-2022/23. Note that the estimated reduction aligns to the estimated difference between net cash player spend (£179.8m) and net player spend by cost (£162.6) put forth earlier in this entry and in Part 2, respectively.
While the figure below only provides net transfer debt estimates for Liverpool (£28.6m) and Manchester United (£271.1m; MUFC’s net transfer debt at 31 March 2024 as proxy), Liverpool’s net transfer debt at end-2023/24 is likely to be modest compared to each ‘Big 6’ club except for Manchester City.
Football Net Debt
Football net debt (FND) is an industry-specific figure that aggregates net financial debt and net transfer debt to provide a more complete view of debt obligations of football clubs.
Summing component figures for Liverpool results in estimated football net debt of £212.9m as of end-2023/24, representing a £26.9m (11.2%) estimated YOY decrease (FND excluding owner debt: £1.9m YOY decrease).
Based on the estimated (i) 11.2% decrease for football net debt and (ii) 17.4% increase for adj EBITDA, the leverage ratio derived from net football debt is estimated to improve YOY from 2.9x to a very modest 2.2x.
Conclusion
With nearly 7 months remaining until Liverpool publish 2023/24 financial accounts and likely around 5 months remaining until the Deloitte Football Money League (DFML) report reveals a partial glimpse via revenue and wage data (supplied by the club), this series has attempted to provide an initial directional view on Liverpool’s financial performance during the period and financial condition as of 31 May 2024. With caveats reiterated that (i) there are notable uncertainties with respect to estimates (particularly with respect to cash flow) and (ii) derived figures are subject to revision, over the course of this series I have estimated:
Mixed profit/(loss) account results compared to 2022/23, with adj EBITDA moderately improved (+£14.8m to £98.5m); +17.7%) due to wage bill rebalancing but the pre-tax worse (-£22.7m to widen the loss to £31.7m) due to increased amortization expense, exceptional items, and reduced player sale profit.
Club-record net fixed asset investment by cost of £210.6m (net player spend: £162.6m; net infrastructure spend: £48.0m).
Substantially higher cash expenditure for investment (£227.8m) than funds generated from operations (£87.5m), with proceeds from the equity investment by Dynasty (£150.0m) covering the difference (and normalizing financial debt that was elevated by club standards prior to the investment).
Moderately reduced net football debt (-£26.9m to £212.9m), reflecting reductions in both net financial debt (-£9.7m to £184.3m) and net transfer debt (-£17.2m to £28.6m).
With respect to Liverpool’s financial position entering the 2024/25 period, despite somewhat underwhelming estimated profit/(loss) results for 2023/24 and muted player investment activity thus far in the summer 2024 transfer window, my sense is that Liverpool is well-positioned financially based on:
A sizeable projected increase in revenue for 2024/25 (per Part 1: +18.7% to £695.3m assuming a third placed PL finish and advancement to the quarterfinals of the UCL).
Likely rebalancing of the wage / revenue ratio that, in conjunction with higher revenue, would result in stronger projected adj EBITDA and operating CF.
Significantly lower capex going forward, allowing for a higher proportion of investment to be allocated to player registration costs (compared to the past decade).
Estimated improved liquidity and modest transfer debt (although the benefit of the latter is contingent upon seller flexibility on terms).
Based on this indicative outlay, Liverpool should have notable capacity for net player investment before the current window officially closes on 30 August 2024 if suitable targets are identified to improve the squad.