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Volume 21 No. 2


It’s been almost two years since Tom Hicks and George Gillett lost their grip on Liverpool Football Club, contending that a runaway board sold the team out from under them to the Boston Red Sox ownership group for a below-market price.

Last week, that contention saw its first light of day in a U.S. courtroom, and the presiding judge appeared sympathetic to the argument that the sale had been pushed through by the team’s top creditor, Royal Bank of Scotland, without sufficient openness.

Mill Financial says it offered to buy the club for 100 million pounds more than what was accepted.
“Ultimately what happened was RBS got up one morning and agreed to the sale of Liverpool Football Club to the Red Sox and … just for the amount of money owed to RBS,” said New York Supreme Court Judge Eileen Bransten, after listening to arguments on whether to dismiss a complaint brought against RBS by Mill Financial, one of Gillett’s lenders.

The case would not unravel Fenway Sports Group’s purchase of the famed EPL club — Fenway Sports Group was known as New England Sports Ventures at the time of the deal — but it could bring to trial what Hicks and Gillett desperately and futilely contended in British courts in October 2010: that the sale had been underhanded and completed at a far-below-market price.

Mill in 2008 lent Gillett $70 million secured by his interest in the team, joining RBS and Wachovia as creditors to the club. Mill wants RBS to repay the loan plus interest, and potentially the lost opportunity of buying Liverpool.

At the heart of Mill’s claim is a tri-party lender agreement the three banks had signed to keep each apprised of developments as Hicks and Gillett struggled to make payments on the loan. Mill maintained that in April 2010, RBS secretly, and so in violation of the lender agreement, agreed to a loan extension only after Hicks and Gillett let RBS appoint a new board chairman, place two observers on the board, hire Barclays Capital as an investment bank and agree to a sale.

Using his fingers to mock the phrase “independent board,” Paul O’Connor of Kasowitz, Benson, Torres & Friedman, Mill’s counsel, contended RBS controlled the whole process and, as a result, Mill has not been paid a penny on its debt.

RBS attorney Marshall Fishman of Freshfield Bruckhaus Deringer countered that the board was independent because RBS did not have a single seat on it. To that, Bransten countered she had been around long enough to know that control came in many guises.

Fishman, after persistent questioning from Bransten, conceded, “of course RBS put conditions on [the loan extension].” RBS contends Mill was not disadvantaged by not learning of the side agreement between RBS and the new board, though, because Mill found out about it several months later.

O’Connor said that was too late and claimed every effort Mill made to stop the sale, make its own offer, or refinance the debt was deemed too late and rebuffed by the board.

“We offered to purchase the club for 100 million pounds more than was accepted,” he said.

At the time of the 235 million-pound sale, the currency exchange rate valued the sale in dollars at around $370 million. A 100 million-pound increase would have added about $158 million to the total, for a $529 million sale.

Mill is controlled in part by Virginia homebuilder Dwight Schar, a limited partner in the Washington Redskins.

There were moments of levity in the hearing, like when Bransten, clearly unfamiliar with the English Premier League, referred to Liverpool as “Livenstin” before quickly correcting herself. She added that if the team were the New York Giants, she would know more.

After the hearing, Fishman said Bransten could take several months before deciding whether to dismiss the case or let it proceed.

The NFL is planning to raise the amount of debt teams can borrow to $175 million per club from $150 million, according to financial and other sources.

The move, if made, would be the first loosening of debt rules among the major sports leagues since the financial collapse of 2008.

The NFL did not confirm or deny what the financial and other sources were saying but did say that as of last week, the subject was not on the agenda for the league’s annual meeting next week. Topics can be put on the agenda on short notice.

The borrowing limit refers to how much of the franchise a club can use as collateral. The league allows other borrowing, such as for stadiums, but anything beyond $150 million currently cannot be secured by the value of the franchise without a waiver.

The NFL long has been the most financially conservative of the four major U.S. leagues, but rising franchise values and the promise of more revenue from the new media deals that take effect in 2014 appear to have the league ready to allow more borrowing.

A higher debt limit might appeal to potential team buyers. Most recently, the Jaguars sold for $760 million.
“Given the new 10-year collective-bargaining agreement in the NFL and franchise values rising to over $700 million, it would seem prudent to raise the debt ceiling to allow clubs to make additional investments,” said Rob Tilliss, founder of boutique sports investment bank Inner Circle Sports and the former head of sports lending at JPMorgan Chase. “These could come in the form of stadium improvements, club operations or be used for team acquisitions. Each club has its own set of needs, but I would think that many of the clubs would take advantage of the increase.”

If owners can borrow more, it also means potential team buyers can finance more, meaning they might be willing to spend more for an acquisition. The most recent sale, the Jacksonville Jaguars, went for $760 million.

One source said the league is considering raising the debt cap even further than $175 million, but that would come in stages, if at all. Tillis said given the strong revenue and valuations in the NFL, banks would not blink at the debt cap rising to $200 million. For now, though, the plan appears to go to $175 million.

Five years ago, the league tried to lower the debt cap to $125 million from $150 million. At the time, the league cited financial conditions, but the NFL Players Association protested, saying it was a way for the league to prevent teams from spending on player salaries. The NFL ultimately did not lower the debt cap.

While the league, in the buildup to last year’s lockout, did not lower the cap, it did tightly control team debt transactions and required often steep pay-downs of borrowings. The Houston Texans in particular bore the brunt of this policy, as the club was compelled to ultimately pay off all the debt team owner Bob McNair incurred in buying the club despite healthy club revenue.

McNair, ironically, is now the new chairman of the league’s finance committee, which would approve any loosening of the debt rules.