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American debt comes to English soccer: Winning tactic or an own goal?

Rey Mashayekhi
·7 min read

When Burnley Football Club announced, on New Year’s Eve, that American private equity firm ALK Capital had acquired a majority stake in the soccer team, it was viewed as a boon for the club from the modest town in northwest England. Burnley have been consistent overachievers in England’s fiercely competitive Premier League in recent years, getting by on a limited budget and a determined, pragmatic style of play. The ALK takeover, it was hoped, would provide added financial security—and a much-needed injection of cash to buy players who could take the team to the next level.

So far, Burnley fans have yet to see those players; the club didn’t make any new signings in the just-closed January transfer window and finds itself battling at the lower end of the league standings with less than half of the season remaining. Instead, fans are left to ponder what the club may have just gotten itself into amid new revelations about ALK’s acquisition.

On Tuesday, the Guardian reported fresh details about the private equity takeover—a heavily indebted, £170 million ($231 million) transaction that was effectively a leveraged buyout of the soccer club. ALK, led by former Citigroup executive Alan Pace, is said to have financed the deal with a roughly £60 million ($82 million) loan from billionaire Michael Dell’s private investment firm; that loan is backed by Burnley’s own revenues and is now on the club’s books, and comes with an undisclosed annual interest rate believed to be north of 9%. What’s more, ALK reportedly funded the remainder of its initial payment to Burnley’s previous owners with up to £40 million ($54 million) from the club’s own cash reserves, with the private equity firm itself putting down only a sliver of the money upfront.

Whereas Burnley was very recently a debt-free entity with £42 million in cash on hand, according to its most recently publicized financial statements, the ALK deal has likely left its balance sheet in a much poorer state—with the club left holding the bag should things take a turn for the worse. (Earlier this month, it emerged that ALK had agreed to simply hand the club back to its former owners if it failed to make three remaining, deferred payments on its purchase.) Pace, for his part, has defended the transaction that netted him Burnley as “absolutely reasonable and sustainable,” adding that ALK is “here for the long haul.”

“Burnley Football Club’s cash reserves remain in a healthy position following the takeover and compare favorably to other Premier League clubs,” according to a club statement provided to Fortune by an ALK spokesperson. “It is well-placed to thrive under its new ownership.”

Private equity players—many of them American investors—have flocked to European soccer in recent years, snapping up clubs across the continent in a bid to capitalize on the global game’s ever-growing appeal and its ever-lucrative television contracts. With a reputation as perhaps the most exciting and competitive league in the world, the Premier League has drawn outsize attention—especially as the league’s TV deals have grown to dwarf those of its European counterparts. In 2015, Josh Harris of Apollo Global Management and David Blitzer of Blackstone Group teamed to take a controlling stake in South London’s Crystal Palace F.C. (the pair also own the NBA’s Philadelphia 76ers and the NHL’s New Jersey Devils). More recently, Silicon Valley behemoth Silver Lake Partners forked out $500 million for a minority interest in Abu Dhabi–backed City Football Group, whose global portfolio of soccer clubs includes England’s Manchester City F.C.

But the history of American investment in English clubs is a checkered one, complete with over-leveraged takeovers that took a turn for the worse, sparked unrest among supporters, and often left the clubs in question in dire financial straits. In the case of ALK’s acquisition of Burnley, the nature of the private equity firm’s buyout has evoked memories of past deals gone wrong—raising concerns among some fans and observers that the club has bitten off more than it can chew.

Liverpool, Man United as cautionary tales

The most infamous example of how an ill-fated leveraged buyout can bring a club to its knees is Liverpool F.C., one of the most decorated clubs in the history of European soccer and the current defending Premier League champions. In 2007, American investors Tom Hicks and George Gillett acquired Liverpool in a deal that saddled the club with hundreds of millions of pounds of debt. When, in the post–financial crisis credit crunch, the owners found themselves unable to refinance that debt, it led to a downturn in the club’s fortunes that sparked major protests among Liverpool fans and eventually drove the club to the brink of insolvency. In the end, only a court-ordered sale to the club’s current (and also American) owners, Boston-based Fenway Sports Group, saved Liverpool from that brink.

Yet another, ongoing concern is the situation at Manchester United F.C., which, like Liverpool, holds a privileged place as one of England’s biggest and most successful clubs. That club is also owned by American investors, the Glazer family (who also own the NFL’s Tampa Bay Buccaneers); when the Glazers bought their controlling stake in United in 2005, they borrowed more than £500 million against the club’s assets—a level of indebtedness that commands tens of millions of pounds in annual interest payments. As one of the richest clubs in world soccer, United has the revenues to make those payments and still put out a highly paid, competitive team on the field. Still, the Glazers’ financial tactics—including paying out lucrative dividends to themselves while the club’s massive debts continue to drain its coffers—have also spurred fan unrest and even raised concerns from British government officials.

Of course, Burnley’s debts post-ALK acquisition don’t come near the levels assumed by those larger English giants after their leveraged takeovers. But neither do Burnley’s revenues—particularly at a time when the COVID-19 pandemic has devastated the sport economically, keeping fans out of stadiums and costing clubs billions of dollars in lost revenues. Should Burnley’s luck in the Premier League run out (if it finishes in the bottom three out of 20 clubs, the team would be relegated to England’s significantly less lucrative second division), it’s not unreasonable to wonder whether the club would be able to service the debt accrued as a result of the ALK deal. A nightmare scenario would see Burnley have to sell off assets—including its best players or even Turf Moor, its 138-year-old, club-owned stadium—in order to do so.

In the club statement provided by ALK, Burnley’s new owners say their financial model “considers all economic circumstances, both on and off the football pitch.” They add that the private equity firm is “committed to investing in this club, the team, and facilities over the coming years,” and note that ALK’s “actions will speak louder than any words.”

In the meantime, English soccer’s governing authorities, like most of their European counterparts, have yet to impose any rules curbing leveraged takeovers of their clubs. Investors are able to rush into the sport in search of glory and gains, picking up clubs with little money down and lots of debt dumped onto the clubs themselves. Should things go according to plan, clubs like Burnley should still be able to operate in a sustainable manner, just as Pace suggests. But if they don’t, there’s plenty of historical evidence as to why fans should feel nervous about the long-term health and viability of their beloved clubs.

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This story was originally featured on Fortune.com