ALK Capital Buys Burnley With Aggressive Debt Structure, Doubts Exist About Their Ability to Service Loans

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Back on Dec. 31, Alan Pace’s ALK Capital closed on its acquisition of the English Premier League club, Burnley F.C. The deal, which reportedly valued the Lancashire-based team at roughly $271 million, was said to have included an upfront payment in the neighborhood of $140 million—the bulk of which came from a loan provided by Michael Dell’s MSD UK Holdings and equity taken out of the team itself. ALK Capital declined to comment on the terms of the loan or the sale saying it is “a private matter.” But if accurate, it’s certainly fair to wonder—as one English Football League club executive did—if a group “that couldn’t really afford [the club] and bought the business on a particularly aggressive debt structure” will be able to service the notes. For the record, Pace has publicly stated the loans are “absolutely reasonable and sustainable.

Our Take: It’s important to understand that prior to the Burnley sale, no EPL ownership group had managed to unload a controlling stake in years. An influx of Chinese capital in the middle of the 2010s sent club valuations skyrocketing and a price imbalance has existed ever since. The dearth of interested buyers—particularly during the pandemic—may help explain why outgoing majority owner Mike Garlick agreed to the heavily levered deal.

U.S. leagues maintain all sorts of rules—including debt limits—to ensure their teams remain financially solvent (see: the Dodgers attempt sell off future TV rights). Those same controls do not exist in European football, which explains why ALK was allowed to structure the Burnley deal the way it did (see: little of its own money). The Football Association is not particularly concerned if any one club goes bankrupt (as several throughout history have) because the English system is “open.” It simply becomes next man up.

High-interest loans are not uncommon in sports—at least on the operational side of the business. While you won’t see NFL or NBA teams taking them out (COVID-19 aside, franchises in those leagues operate at break-even or in the black), NHL clubs hurting financially will borrow beyond the league’s credit facility (think: the Arizona Coyotes of the world). MSD Capital has also lent a handful of European football clubs money over the last year.

To be clear, borrowing money to fund the purchase of a sports team is not necessarily a bad idea. The issue here is the amount of money ALK borrowed (said to be about $82 million from MSD; it’s unclear how much was borrowed from the club’s own bank account) and the interest rate they’re believed to be paying (between 9.5-12%). European soccer clubs have been bought on debt before (see: Manchester United). But a club like MANU isn’t going to get relegated. It simply has greater resources than most. If Burnley stumbles, it is headed to The Championship. It’s unclear how ALK would manage to pay the loans back if the Clarets dropped down a division. Remember, relegation comes with a dramatic drop in revenues. The team’s television money alone would fall from roughly $130 million/year to about $4 million/year.

Burnley, a perennial outperformer on the pitch, has been profitable off it in recent years. And should the club manage to remain in the Premier League, ALK is unlikely to incur any problems meeting its debt obligations. “If they continue running the team the way it has been run (i.e. cost-efficient) and they remain in the Premier League for the next five years, the business will be able to service the debt for the new owners, and they’ll come out of this deal OK,” the EFL club executive said.

Still, that is a risky bet to make—even if ALK only invested a relatively nominal amount of its own capital. Three teams are relegated every year and Big Six aside, even the best-run clubs eventually find themselves playing on the Championship level (see: Aston Villa and Newcastle circa 2015-2016). If Burnley suffers an unfortunate on-field setback, “[ALK] is in big trouble. Even without debt, relegation is a massive problem when you have Premier League infrastructure and payroll,” the EFL club executive said from experience.

Mike Smith (Executive Partner, ALK Partners) agreed that in “many cases, with many clubs,” relegation threatens the business model. “You see a lot of balance sheets and a lot of [times it] is pretty ugly. And for that reason, for many, many football clubs, doing [a heavily levered deal] is not feasible or viable.” The ALK Capital partner says the difference with Burnley is that the team is being run with sustainability in mind (think: developing instead of buying players). Prior to buying Burnley, ALK kicked the tires on Sheffield United. “And Sheffield was a Championship club at the time. So, we actually developed a profitable business model that could function at a Championship level.” While it’s no doubt the club’s intention is to remain in the Premier League, Smith says Burnley is being structured in a way that the debt can be sustained at either level. The EFL club executive we spoke to had his doubts about achieving profitability in The Championship.

ALK reportedly agreed to turn the franchise back over to the outgoing shareholders should they fail to make one of the three deferred payments remaining on the club, so it’s fair to wonder why MSD would lend the money if there was a chance of default on the loan. Requests for comment went unanswered. But the EFL club executive suggested the loan is almost certainly secured by being “first out on parachute payments”—money designed to help clubs transition from a Premier League to a Championship League budget.E

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