(note: if you don't want to read through all this just scroll to the 3 parts in red).....
Ladies & Gentlemen... Meine Damen und Herren ~
Meet Peter J. Schwartz, Paul Maidment and Michael K. Ozanian..
(click)....................(click)....................(click)..These guys are the researcher and two editors at Forbes who came up with that $822M valuation (£515M) of LFC.
You know... that same valuation that Hicks is using in his argument to block the sale of the club.
I should start out by saying that these guys are journalists, they aren't professional investors or bankers or consultants, and even then some of their "journalism"
is down right EMBARRASSINGLY BAD. So for them to even be attempting to come up with expected "valuations" of clubs (let alone publishing those expected "valuations") is a little preposterous.
Judging from their backgrounds, Schwartz likely did the grunt work crunching numbers, Ozanian signed off on the valuations, while Maidment probably just slapped his name on there because he was Executive Editor of Forbes.com.
I am an institutional investor. I trade equities all day here in NYC and I do so by understanding a company's fundamentals. I've been doing it for a number of years. And one thing that I can tell you is that determining "Valuation" is more Art than Science
.I'll give you an example of what I mean by that :
- Company ABC and Company XYZ are in the same industry
- Same revenues
- Same profitability
All things being equal, you would think that both these companies would have the same value.
It turns out that Company ABC has a valuation of £900M and Company XYZ is valued at £300M.Why the big 3X difference in valuation if the numbers and the make-up for both companies are the same ?
Why is Company ABC trading at triple the price-to-sales ratio ?
Why is Company ABC trading at triple the price-to-earnings ratio ?This is where the "Art" comes in...
.."Okay", you say... "I get that Company ABC should have a higher valuation because of those factors, but why is it a 3X difference? Why not 2X? Why not 1.5X?"
- It turns out that Company ABC has a killer management team, while Company XYZ's are bottom of the barrel
- It also turns out that Company ABC can pay their debts, while Company XYZ can't
Great Question ! And that is EXACTLY one of the places where these Forbes guys screwed up. They have no concept for the "Art". They don't know how to determine the valuation multiple.
At the beginning of the Forbes article
, this is what they say about how they are determining these valuations :..So what does that highlighted part mean ?
It means that they are coming up with their "valuations" based off of the clubs' revenues. They are looking at what the club did in revenues in the previous year, multiplying it by some number and coming up with their current valuation.
Sounds simple enough... So what number did they pick to multiply the revenues by ? (pardon my crude chart)..How the heck did Forbes come up with a 2.7 price-to-sales multiple for Liverpool ?
Well at the beginning of the article they did say "Our team values are calculated using revenue multiples based on historical transactions." Okay fair enough. So let's go back and look at the most recent "historical transaction" for Liverpool. Let's see what revenue multiple Hicks & GG valued the club at in pre-world-wide recession 2007 when they purchased this fine club, which I remind you had basically zero debt at the time.
In 2007, Hicks & GG bought Liverpool for £219M. In the 2005/06 season Liverpool had revenues of £122M. That's a price-to-sales multiple of 1.8X. 1.8X ?!? That's a long LONG way from the 2.7X multiplier that the Forbes guys just used.
So if Forbes was really basing their multiples on "historical transactions" they would have used a 1.8X price-to-sales multiple...Let's see what Forbes' valuation would have been if they used that 1.8X price-to-sales multiple that Hicks & GG used in 2007 when they purchased the club:
- (LFC 08/09 Revenue) X (price-to-sales multiple) = Valuation
- ($304M) X ( 1.8 ) = Valuation
- $547M = Valuation
- or converted to pounds £340M
And remember that 1.8X multiple was used for a Liverpool club that had ZERO debt at the time, and we just came up with a number that puts the club at £340M. Also remember that 2007 was before any world-wide recession. It was before half of the EU was bankrupt.
Tack on the current debt and the fact that the club structure can't pay the debt let alone even the interest payments and do you think that multiple should get bigger or smaller ? That's right, smaller.
So it definitely shouldn't be 1.8X. That's too high given the debt, let alone the economy. Should it be 1.5X or 1.2X or even 0.9 ?
- A 1.5X price-to-sales ratio gets us to a £285M valuation.
- A 1.2X price-to-sales ratio gets us to a £225M valuation.
- A 0.9X price-to-sales ratio gets us to a £170M valuation.
I don't know what the right valuation should be (I haven't done the exercise yet)But the takeaways for us should be :
- Henry's NESV offer of £300M does not under value the club. If anything it OVER values it by a considerable amount.
- These Forbes guys did some bad bad really bad work.
Okay, so it's bad enough that they screwed up the "Art" when it comes to determining the multiple...But what is inexcusable is that Forbes didn't even value these clubs using the same criteria...i.e. Forbes forgot to include DEBT in their valuation for some clubs, but included it for others.
- Guess which club Forbes didn't consider the debt when placing a value on it.... You got it. Liverpool.
Here's the fine print from that Forbes article :.
That's just DUMB. Take a look at their valuation table
and see what I mean.
Normally when you are going to compare things you measure them like-for-like. You don't compare apples to oranges. But that's exactly what Schwartz, Maidment & Ozanian did.
I have no problem with Forbes putting out lists like that and taking a stab at the valuations. I enjoy looking at it as much as anyone. But this was just shoddy work. They should really be ashamed.So, more importantly, what does all this mean for Henry, Broughton, Purslow, etc... ?
- They are going to be able to SHRED Hicks' ludicrous $822M Valuation (£515M), based off of what I highlighted above. The fact that Hicks keeps slinging that Forbes valuation around is going to bite him in the rear-end. He's obviously doing it to sensationally highlight to the press & Courts the big £215M difference in numbers £300M (Henry) vs £515M (Forbes), but in reality that Forbes valuation has no meaning.