Is The Red Sox Parent Company Testing the Soccer Futures Market?

John Henry has always had a love affair with numbers and baseball.  Which came first is hard to tell.  The hedge fund manager is without a doubt one of baseball’s biggest fans and it’s said his love of the game led him to memorize and calculate the stats of his boyhood favorite Cardinals.

Now he’s throwing around more numbers or, more accurately, his New England Sports Ventures is…as in 300 million pounds (roughly $476 million) to purchase the Liverpool Football Club from current owners Tom Hicks (former Texas Rangers owner) and George Gillett.  The purchase was agreed to by the Liverpool FC Board but Hicks and Gillett are fighting their Board because they value the club at a much higher price.

The club also has a 237 million pound debt ($350 million) owed to the Royal Bank of Scotland and it’s due this Friday; if the sale is completed by then, NESV would settle the debt with RBS and the new owners would have a club free and clear of debt.

Roughly $825 million is no small investment; it’s more than the $700 million NESV paid for the Red Sox.  Is Henry and company testing the futures market of pro sports, specifically, soccer?  What does NESV spending that amount on the purchase of a soccer club mean for their crown jewel, the Boston Red Sox?

To the second question, the baseball team’s President and CEO Larry Lucchino said, “To be clear, while it is exciting for all of us as global sports fans, this is an undertaking of the NESV partnership, which owns the Boston Red Sox, New England Sports Network, Roush Fenway Racing, and Fenway Sports Group.  It is not an undertaking of the Boston Red Sox and will not divert our resources or focus on the job at hand — winning a third World Series for the loyal members of Red Sox Nation.”

Aside from the purchase price and the payment of the assumed debt, Liverpool is one of England’s and Europe’s largest soccer clubs with an assortment of revenue streams.  With the debt removed, those revenue streams will allow the club to function without much need for any additional funding from NESV.

In fact, the Liverpool business is as sound as the business operation of any professional sports franchise in the world.  Their problem has been the debt Gillett and Hicks took on purchasing the club.

The American duo hired Ian Ayre as their Commercial Director to change the club’s business operations and in three years he has successfully positioned Liverpool so its commercial revenue is a significantly larger portion of the club’s overall revenue than other English clubs similar in size.  Ayre has revamped the Liverpool operation to maximize its revenue streams and profitability away from broadcast rights and game day income.

Based on a cursory review of the Liverpool sale at face value it appears Lucchino’s words are accurate.  NESV would operate the two separately as they do with the Sox and the NASCAR team they co-own.

But…could there be a negative impact?  Liverpool currently sits third from the bottom in the English Premier League.  The bottom three teams in the league are relegated to the second division Nationwide League at season’s end.  The club needs to bolster its roster when the transfer window opens in January to give manager Roy Hodgson more options and depth on his roster.

The club has been selling off some of its best players to help manage the debt.  The talent drain, combined with injuries, has led to a poor start for England’s all-time winningest club.  A cash infusion would come from NESV not the Red Sox but it could take funds that might also be made available to Theo Epstein if the right player or deal presented itself.

The bigger issue long term is Liverpool pulling out of the relegation zone.  The drop to the lower tier would cost the club millions of dollars, as well as players and prestige.

They would lose the TV revenue from the EPL (roughly $50 million per year), income only EPL teams generate and wouldn’t have a chance to qualify for lucrative European competitions that mean extra income.

Relegation also means the club’s top stars leaving to continue playing top flight soccer and to remain viable for sponsors.  Prime stars Steven Gerrard and Fernando Torres will look to jump to another team in one of the world’s top leagues. Here’s an easy comparison…if the Red Sox dropped to Triple A-Josh Beckett and David Ortiz would want a trade to another Major League team.  It’s also likely a second division Liverpool might not be able to afford to keep all their top talent.

If the club could afford to keep its best talent and give them the incentives to play in the lower league for a year they should be able to earn promotion back to the top flight after just one season but one year at the lower level wouldn’t be a good way to start ownership.

When the pending sale is completed they have promised to return Liverpool to the days of glory and an immediate action plan makes relegation unlikely.  The current ownership has created an environment of doom and gloom and the change in ownership would lift that cloud; a resurgence of the team might occur without the need to spend an additional dime on new players.  But the players are needed if the team aspires to return to its spot among the top four.

Could getting the soccer club back on track prove a bigger, more distracting task than anticipated?  Could NESV become so focused on Liverpool that it fails to monitor the Sox?  While the soccer club could need more attention than it currently appears, NESV has been very good at putting the right people in the right places.  Larry Lucchino will not allow the parent company to forget about the Sox.

The biggest distraction is this week.  If the current owners are successful in fighting the sale, it’s probable that the debt payment due Friday won’t be made and the RSB will begin bankruptcy proceedings.  This will bring a nine-point deduction from the EPL and Liverpool will drop to last in the standings with a negative point total.  They would be nine-point below the first team out of the relegation zone.  That makes remaining in the EPL very difficult.

If that happens NESV has said they will have to decide whether to renegotiate or withdraw their offer because a second tier soccer club (even a legendary club like Liverpool) isn’t as valuable.  It’s likely the withdrawal of their offer would happen.

Again, why are John Henry and NESV buying a soccer club?  It could be the 61-year old has discovered a fondness for soccer or they want to try to clean up another mess (remember the Sox when they bought them from the Yawkeys?).

It’s more likely the owners of the Red Sox know a good investment when they see it.  Futures is Henry’s primary business after all.  Liverpool is a world famous name, more famous than the Boston Red Sox, Dallas Cowboys, or Los Angeles Lakers, and rivaled only by a handful of soccer clubs and, sorry Red Sox Nation, the Yankees.  The 2010 Forbes list of top sports teams had it at 41 but the ranking is based on value and not name recognition; look for it to jump up that list once the huge debt is gone.

The club has the potential for producing untold amounts of cash as the club takes steps to expand its reach.  One of those steps is following other English clubs to the promised land of America.  While Manchester United and Chelsea have made a couple of trips to the US, Liverpool hasn’t jumped across the Atlantic as aggressively; but soon they will be here to play pre-season exhibitions and open youth training programs.  It’s about selling the brand.

Just this past summer Fenway was host to a Celtic FC game.  The Scottish side drew well in the Boston ballpark and the owners of Fenway are sure add more soccer dates to their ballpark’s calendar in the future.  If the company owns one of the most popular clubs in the world it’s a match made in corporate heaven.   Fenway makes money, Liverpool makes money, NESV makes money.

The deal has a much greater upside than down.  NESV still has to make sure Liverpool climbs from the relegation zone and returns to the position of standard bearer in English Football as has been promised.  However, that scenario is more likely than a continued slide to the second division.  NESV did deliver on breaking “The Curse” didn’t it?

Success on the soccer fields of England is likely to lead to greater success on the baseball diamond.  Two grand old clubs comparing notes and sharing ideas; imagine the sports marketing potential NESV offers…potential sponsors for the tidy sum of 150 million per year…you get…one of the top clubs in the world’s favorite game, one of the top two clubs in America’s favorite pastime…and sponsor-friendly NASCAR to boot.  That could be divided $60 million for baseball and soccer with $30 million to racing and that’s just one sponsor.  There could be a long line, even in this economy.  The future and futures could be very good for NESV.  That means the future and futures of Red Sox could be very good too.

Tim is a life-long Pirates fan who aspired to be the next Bob Prince. Of course, the Gunner was replaced before Tim was out of high school and Lanny Frattare got the job but that didn’t stop him from making his way into the press box. Following college, Tim began covering the Pirates, as well as the other pro and college teams in Pittsburgh, for WBZZ-FM and WMBA-AM.