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New investment in Everton by Chinese investors or sponsors?

April 23, 2017

the esk

Speculation has arisen that Everton will award naming rights to our new stadium on Bramley Moore Dock to a “a wealthy Chinese consortium”.

I’m highly sceptical that such a deal could be put in place so early in the stadium process, given Everton have only recently acquired the rights to Bramley Moore, but do not yet have confirmed financing (although rumours of substantial domestic institutional interest grow stronger week by week), let alone planning permission nor final designs.

All of these steps in the process will happen of course, but it seem highly improbable that “advanced” talks are in place whilst so many key components of the stadium are yet to be finalised.

There is without doubt interest in English football clubs from Chinese investors, albeit as buyers of equity (shares) rather than sponsorship of stadia or other naming rights. Most will be aware of the Chinese (CMC) stake in Manchester City’s parent company, West Brom’s Chinese owner Guochuan Lai, and both Wolves (Fosun) and Aston Villa (Tony Xia) in the Championship.

I think it is extremely unlikely that any new or incoming investors, Chinese or otherwise, would acquire a significant interest in Everton at this time – Moshiri is certainly not a seller, Kenwright, Woods and Abercrombie are constrained by an options agreement to sell their shares to Moshiri, leaving only minority shareholders to purchase from and Moshiri has stated he does not favour an additional issue of shares to finance the development of the club.

The media have been awash with stories of large Chinese investors and institutions interested in investing in Premier League clubs, from Lander Sports Development’s interest in Southampton (which did not conclude)  and CITIC Securities reported subsequent interest. Additionally HNA Group are reported to have had discussions with Chelsea, potentially with regards to their stadium development, but again without conclusion.

Spurs are several years ahead of us in terms of stadium build and development, yet even with their business acumen, London location, higher profile and currently higher performing team they’ve not been able to secure a suitable naming rights deal from global investors let alone the Chinese.

Thus it would be an extraordinary change of investment strategy by any investor, particularly the Chinese, who to date (as above) have taken equity stakes in Manchester City’s parent company, Aston Villa, Wolves and West Bromwich Albion, to “invest” in naming rights at such an early stage in the stadium’s development.

Therefore to conclude, I believe these reports, in the absence of a significant change of strategy by the Chinese to be highly premature. It’s perfectly possible that discussions have taken place, but it’s unlikely in the extreme that they’ll be substantive at this point.

The financial value of Everton – a huge leap forward in coming years

April 12, 2017

the esk

There was a time when the value of a football club had nothing to do with the ordinary fan, finance was a matter strictly for the board and shareholders to be concerned with, yet in the last 10 years or so much more attention is given to such matters, and quite correctly in my opinion.

In years gone by not only were football clubs owned by local business people, often well known in their respective towns and cities but also protected under FA rules.

What became known as rule 34 stated that “being a club director was a form of public service, that directors should be ‘custodians’, to support and look after clubs”. It was this rule that prohibited directors from being paid, restricted the dividends to shareholders, and protected grounds from asset-stripping.

These rules fell by the wayside in 1983 when Spurs created a holding company structure (with the implied permission of the FA) which released club directors from the responsibilities of rule 34.

All of which brings us back to Everton, and the scrutiny and discussion surrounding the club’s finances over and beyond the information provided by the club and at shareholder meetings.

The forthcoming new stadium has a huge impact on Everton’s financial future, much of which has been discussed previously, and will of course be discussed further as more information is released in the coming months.

Football Club Valuations

One of the interesting areas of club finances is the valuation of a football club. Now, as with all businesses there are differing models that can be applied to working out the “value” and none of these models will necessarily relate to the value of a transaction, nevertheless they can and do indicate a range of values which can indicate the relative health (or not) of a club.

Take for example, two recent transactions that everyone will be familiar with – Usmanov’s acquisition of Moshiri’s Red & White Holdings, and of course, Moshiri’s acquisition of 49.9% of Everton’s shares from Bill Kenwright, Jon Woods and Arthur Abercrombie.

The reported figure of £200 million for 15.02% of Arsenal shares put a valuation of £1.33 billion on Arsenal, yet at the time the market capitalisation was approximately £933 million.

Moshiri paid a large premium for his Everton acquisition

Similarly, Moshiri’s acquisition valued Everton at £175 million, yet none of the established models would provide such a valuation, indeed the method I’ll be using implied a value of around £87 million, suggesting that Moshiri paid up to a 100% premium for his stake. The traded value of the shares (around £1300 per share at the time) suggested an even lower value of around £45 million.

This might seem outrageous but as will be explained later, still represents good value.

Ultimately, as with all business transactions, the shares in a club are worth what a buyer is willing to pay, and what a seller is willing to accept.

I’m not going to go into all the valuation models you’ll be happy to read, but I’ve chosen the model which best correlates with transaction values and provides a consistent basis to either compare different clubs or the change in value over time at any given club.

For many years whilst we sought investment it was often tripped out that our lack of finances and the need for a new ground was putting potential investors off. Now I’ve never understood that argument for the very reasons we will now see. Buying a club in relative poverty with a large future capital requirement to build a new stadium should, assuming normal market conditions and continued presence in the Premier League produce significant capital profits to the incoming investor.

Let’s see what happens:

Markham Multivariate Model

Doctor Tom Markham devised a formula (model) for valuing clubs based on hard data from their published reports.

He looked at 5 key variables to make his calculation.

Revenues (turnover): How much does a club earn in a financial year?

Net Assets: What value does the club’s balance sheet have?

Net Profit: How profitable is the club?

Stadium capacity %: What % of capacity does the club attract per game?

Wage to turnover ratio: What % of the club’s revenue is spent on wages?

Using these variables he created the following Markham Multivariate Model:

MMM

Put simply, the higher revenue, net assets, net profit and stadium capacity % are the greater the value of the club.  Equally, the higher wage ratios are then the lower the valuation.

Applying figures taken from the last set of accounts (2016) we arrive at the following valuation for Everton:

Revenues £121,540,000
Net assets (£43,404,000)
Net profit (£24,333,000)
Stadium utilisation % 96.5%
Wage/turnover ratio 0.69
Valuation £87,400,000

Now any projection of future values, has to obviously include certain assumptions on revenues and expenditure, and in Everton’s case the impact of the new stadium at Bramley Moore on numerous factors including sponsorship, commercial revenues and match day revenues.

I’ve made what I believe to be very reasonable assumptions, giving a reasonable worst case and actually an understated best case.

From my perspective it is the stadium that is the key driver in our increased turnover and profitability – yes there are increases in broadcasting revenues, but I’ve assumed no growth in them from this season, just the uplift from the last published accounts.

I’ve also allowed the improvement in our profitability going forward to clear the current net liabilities, and I’ve made no alteration to the net asset value arising from the stadium itself, the assumption being the value will equal the debt arising from the funding vehicle.

Base case Better case Best case
Revenues* £216,000,000 £255,000,000 £275,000,000
Net assets* 0 0 0
Net profit* 0 £40,000,000 £50,000,000
Stadium utilisation % 95% 95% 95%
Wage/turnover ratio 0.64 0.57 0.53
Valuation £317,000,000 £493,000,000 £586,000,000

Thus, it is very clear that with the building of the new stadium at Bramley Moore, shareholders in the club will see a significant uplift in the valuation they might expect at the point of a sale.

Whilst these valuations look ludicrous compared to the current and previous valuations of the club, they need to be put in context. Even at the higher end of the valuation scale we’ll be approximately half the value of Spurs, and less than 20% of the value of Manchester United

It’s clear to me that Moshiri saw a desperately under-valued asset in Everton, and fortunately had the means not only to acquire a major interest but also to repair the balance sheet with his £80 million loan to the club.

You might recall from previous articles that the repair of the balance sheet was the necessary pre-cursor to the deal with Peel and then the subsequent (to be announced) funding for the stadium.

Not only are we going to see success return on the pitch through the excellence of Koeman and his coaching squad, which of course is the most important factor, but shareholders are going to see significant increases in the potential value of their Everton shareholdings.

The quiet Moshiri revolution is going to significantly impact us on and off the pitch, to the benefit of us all.

As I said in last night’s tweet, wise man that Moshiri…..

*the assumptions made consider increases in income arising from the stadium in terms of matchday income, increase in commercial revenues and sponsorship plus the potential revenues from regular European participation. For ease of calculation I’ve assumed a neutral net asset value, in practice with the projected revenues and profitability they would increase year on year.

New stadium won’t hinder on-field progression

April 7, 2017

the esk

This article first appeared on The Blue Room on 29th March 2017.

I was asked an interesting question on Twitter in comparing the Arsenal Emirates stadium financing to the proposed financing of Bramley Moore.

It’s widely thought that the stadium financing of the Emirates has held Arsenal back since 2006, and that this is the principle cause of their relative lack of success in the last 10/11 years. Well, I don’t subscribe to that view at all. Whilst it’s true that the original terms were quite onerous (more later) and considerably more onerous than the proposed Bramley Moore stadium terms, the major reason for not competing with Arsenal’s peers lies with the Arsenal board not their financiers.

The fact is that the Arsenal board are guilty of several strategic decisions which has led to Arsenal not being as competitive in the transfer market as their financial strength and revenues would allow.

The whole period with Wenger’s tacit approval has been marked by caution and in my opinion excessive financial prudence.

Usmanov and Moshiri as owners of Red & White Holdings were both critical of the board’s original and subsequent unwillingness to put cash into Arsenal’s business, relying more on debt to fund the stadium. Now that may seem a little odd, particularly in the light of Moshiri’s strategy with everton, but more of that in a few minutes.

When the Emirates stadium was built in 2006, the cost was £390 million, £130m was provided by the club and £260m in the form of a 14 year fixed rate senior debt deal with a number of banks including RBS.  In addition further loans were provided for working capital purposes and for the property development division of Arsenal dealing with the redevelopment of Highbury.

The initial £260 million was lent in 2003, and was subsequently converted into a £260m bond issue in 2006. One of the conditions of the 2006 refinancing was that Wenger commit himself to the club until at least 2011 – a clear indication of his compliance with the financial prudence strategy of the club.

Such has been the financial prudence of the club and not only in the early years, that in the period 2007-2015, 36% of the club’s expenditure (including net spend on players) has been on debt interest and debt repayment. This is an important figure, something we will return to when looking at Everton.

Further to the above Arsenal have devised a trading strategy of generating profit principally from two sources – player trading and property development profits from the old Highbury stadium and associated properties. This has covered operational losses, and allowed Arsenal to build a significant cash pile which in net terms almost completely wipes out their remaining debt.

Player trading – a big part of Arsenal’s financial strategy:

chart1

Figures in £m

Aggressive accumulation of cash to reduce net debt position

chart2

Figures in £m

So there’s Arsenal’s financial strategy since the Emirates has been built, prudent building up cash, reducing the net debt, whilst generating considerable profits from player trading.

A deliberate strategy with the compliance (and to a large part, executed) by the manager Arsene Wenger.

TRANSITION: The Esk examines how Arsenal managed their finances during their move to The Emirates just over a decade ago.

So how does that compare with the proposed financial deal to deliver a brand new, iconic stadium on the banks of the Royal Blue Mersey?

Firstly it has to remembered that Everton remain relative financial tiddlers compares to Arsenal with our 2016 turnover being £121.5 million against Arsenal’s £350.6 million.

The proposed funding package for Bramley Moore Dock is an entirely different proposition to Arsenals – size of turnover being one of the considerations.

Everton have gone for a long term structured debt repayment strategy, largely covering all of the costs of the stadium,  whilst using a combination of the City Council’s Balance Sheet and a charge against all assets of the club to provide a secure low interest debt deal.

The objective is to minimise the burden of the stadium financing at a time when the club is in an expansionary phase regarding player and squad development, yet from a low but rapidly rising income base.

As mentioned, in the last accounts Everton had turnover of £121.5 million. I’ve done some estimates of the likely turnover by the season 2020/21 our likely first year in our new stadium.

In that year I’m assuming the following turnover figures:

chart3

Obviously these figures are estimates, based on Premier League participation and Europa League qualification. For non-qualification revenues would probably fall by £30 million (including sponsorship) and for Champions League last 16 qualification rise by a minimum of £20 million. Therefore the range may comfortably be expected to be £245 million to £295 million per annum 2020/21 onwards.

This turnover figure is extremely important as we can determine the affordability of the proposed Bramley Moore financing package.

Estimates have varied from £14 million to £17 million annual “rent” costs. I’m going to be slightly more cautious and say for ease of calculation £20 million.

Based on these figures, the loan “burden” on Everton should represent base case 7.3% of turnover, best case 6.8%, and worst case (assuming continued Premier League membership) 8.2%.

This needs to be compared with the percentage of turnover applied to interest and debt repayment at Arsenal 2007-15, 36%

The original question asked about how Arsenal financed their stadium and the impact it had on their player acquisition, and how that compares to Everton. Clearly the Arsenal board has had a greater impact than the stadium may necessarily have had itself, but the message for Evertonians is that the proposed Bramley Moore scheme has minimal impact on the normal finances of the club and actually allows us to significantly build revenues assisting the ongoing development of the club, a better quality squad and higher wages arising from non-broadcasting incomes.

Far from being a burden, Bramley Moore is an affordable, yet critical enabler in the development of the club, back to competing with the biggest and the best.

 

Too much expectation when the facts don’t support them? Or…

April 3, 2017

the esk

When you support a team or just like when you love someone, objectivity often gives way to perhaps unrealistic expectation, and in the case of Everton, unashamedly I’m as bad as most in this respect.

GettyImages-589067842

Against the footballing odds, every year I’m expecting us to roll up to Stamford Bridge, Old Trafford, The Etihad, The Emirates, White Hart Lane and even Anfield and do the business – show the footballing world and the media that they’ve got it all wrong. We are “the greatest team the world has ever seen” and that Leicester are not unique in upsetting the Premiership apple cart. Even after Saturday I’ll probably tweet “Everton 2-0 winners v United, Lukaku & Barkley” sometime before kick off at Old Trafford – we all do it, or most at least.

Of course, the evidence suggests otherwise, and more often than not it ends in bitter disappointment. Our record against the top 6 is poor, particularly away from home as several statistical sites have shown us in recent days.

One of the theories is a fear factor that has pervaded the corridors of Goodison for the last 20 years, since the end of Joe Royle’s tenure. I don’t subscribe to that fully as it provides hiding places for individuals – I’d prefer individual accountability as mentioned in previous articles.

The fact is we have no right to win at any of these places (i) because that’s not how professional sport works, but (ii) and more importantly the gulf in resources is just so great.

There’s been plenty written about transfer budgets and net spend – how for example it appeared that we sold to buy in the summer for example – not something I subscribe to given the number of other transfer bids we made, albeit none getting over the line.

What’s often overlooked is the cost of growing and maintaining a top squad. This is the most important single measure of understanding how much a club has spent to get to the position it occupies.

In order to arrive at the figure we need to look at two sets of figures in the accounts (i) wages and (ii) player amortisation. This gives the most accurate report of the cost of putting together and running a squad. It’s a much more meaningful representation of investment in the team than net spend, gross transfers etc etc.

Before we look at the figures, a quick explanation. Players are in accounting terms “intangible assets”. Thus the moment they’re bought their value on the club’s balance sheet starts to fall in line with the length of their outstanding contract. (This has nothing to do with the market valuation of the player). So a player bought for £20m on a 4 year contract, will see a charge (amortisation) of £5m per year against his value. By aggregating the total amortisation we can get an accurate apples v apples comparison of what a club is spending to be competitive (or not).

In terms of caveats, one possible flaw to this method is the treatment of players brought through the academy. Take Ross for example, his value in terms of the balance sheet is zero, as because we never paid anything for him in accounting terms he has no value. (Obviously his market value is very different).

So, on to the figures:

Below is the amount of money each of the top 7 have spent on wages and accounted for amortisation of their players over each of the last 6 years:

Annual wages plus player amortisation, £m

2011 2012 2013 2014 2015 2016 Total
Chelsea 208 226 232 265 285 295 1511
Man City 258 285 314 281 264 292 1694
Man U. 192 200 223 270 303 320 1508
Arsenal 146 180 196 206 246 254 1228
Spurs 130 115 121 140 138 132 776
L’pool 165 165 168 185 227 272 1182
Everton 75 76 74 88 97 106 516

In chart form it looks like this:

Annual spend

So the big question is what can be done about the above? The glimmer of hope is Spurs. Whilst they’ve spent more on wages (£579 m versus £414 m over the last 6 years) the difference is not so great as for example, Manchester City with £1.2 billion.

Spurs are proving that it is possible to compete on significantly less than their competitors through two main factors I believe – their manager Pochettino and secondly, the excellence in the way that Daniel Levy runs their club.

The questions for Evertonians is can Koeman compete at a similar level to Pochettino as a manager and coach, can Walsh deliver in finding value among less known players, can the academy deliver players capable of performing at the higher end of the Premiership, and finally can the business be run on a par with Spurs? I suspect we can match them for being parsimonious, but as I’ve often stated before, outside of the main shareholder and his representative we don’t appear to have talent and ambition in equal measures.

We’re moving forward on and off the pitch there is no doubt about it, we have a great manager, an improving team with real prospects, an academy that is the envy of many, but because even with Moshiri on board, resources in terms of spending on players is still limited by regulations in comparative terms versus our peer group (albeit it will be significantly higher than previously) we have to be smarter, and work harder than our peers.

The stadium is evidence of the smarter route, innovative and with what should be a contributory impact on the finances rather than a burden elsewhere. Spurs in fact are likely to suffer similarly to Arsenal at least in the initial years post stadium construction.

As with the players, each and every member of the Board, Executive team, and football management team must take personal responsibility and accept accountability in the years ahead.

If they do so, or are replaced by people more capable and more accountable, then the facts will support the expectation.

One thing is for sure, we shouldn’t change expectations, they should continue and in the eyes of others they should still be unrealistic, but need to change the facts to support them, so that the gap between objectivity and expectation ceases to exist.

We’ll get there, starting tomorrow, 2-0 the Blues.

NSNO.

Some thoughts on today – Derby day Blues by name & nature

April 1, 2017

the esk

The recent Spurs’ game and today’s Derby is a sobering reality check in terms of where we are in Koeman’s project. The defeat is still raw but the manner in which it’s being portrayed is not accurate in my book.

14910544298194

I’m going to start by addressing this so called “fear” of playing Liverpool. It’s nothing more than a convenient label that requires no thought or analysis. It’s all so easy for pundits or whomever to say “Everton possess a fear factor, a mental block versus Liverpool”.

Four Everton players had never started a Derby game, so how can they fear or have a mental block about something they’ve never experienced?

It’s a totally inaccurate and lazy way of judging the real problems, which is leadership and accountability as individuals. Yes, football is a team sport, but for a team to function and achieve its objectives each individual has to perform to the level expected – each achieving and completing their given tasks in order to function as a team. Only teams with exceptional talent can perform when one or two players are not at their best. We don’t possess those players currently, and sadly it was more than one or two who didn’t perform. Part of that is down to youth and inexperience, the rest is a reflection on the abilities of the senior members of the squad.

There’s not an Everton player on the pitch today who will have met their individual objectives set prior to the game. That’s what needs addressing.  Koeman and his people have to sit down with each individual and say “we agreed the following…….., yet it didn’t happen. Why did it not happen, and what has to change to ensure it doesn’t occur again?” Now for several it’s probably too late in their careers, particularly their Everton careers to do much about it, but for the youngsters surely that’s the only way they’re going to learn from the experience.

The way to learn from days like today is to take individual responsibility for your own actions, there’s no point in hiding behind the team performance or “fear” – that’s not an accountable action.

To compound the lack of individual responsibility, there was a total absence of leadership on the pitch to identify and address the problem. Leadership has of course been an issue for a long time and will surely be addressed in the summer. The only time today I saw any, was Lukaku of all people, making sure that Lucas did not talk Barkley into the referee’s book early in the first half.

Whilst we have a core of promising youngsters, the paucity of our squad was laid bare again today. Koeman will have put out what he considered our best available team and his tactics probably acknowledged that he’s aware of our relative strengths and weaknesses. However, for the tactics to work, individuals across the team had to perform their given tasks. Having just Gana and Davies in the centre of midfield is a great display of confidence in their abilities. As it happened, it didn’t work – not only did neither not perform to standard but nor did their team mates around them.

We’re surely seeing the last season of Jags, Williams (albeit his first) and Funes Mori in the centre of our defence, either in a back four or a three/five like today – Robles who had a terrible game was left horribly exposed for each of the three goals.

What of Ross? I can only say the occasion got the better of him, perhaps the fact that it was the Derby and the frustrations of his international break got to him. Regardless there are significant behavioural weaknesses to his game that become all too evident on occasions like this. Until he learns that self control and decisiveness in thinking, especially on the big occasion, he’s going to remain a talented but enigmatic figure who won’t meet his full potential.

Romelu? I don’t subscribe to the “he wasn’t arsed” comments but he was horribly isolated even with Calvin Lewin supposedly playing close to, alongside him. I’d say three things to defend his attitude today, his actions in stopping Barkley from receiving an early booking, his reaction to our goal, and in the second half the positions he took up in the box. Holgate had several opportunities to deliver but failed to deliver beyond the first man. Had Coleman been on the pitch, Lukaku would at least have had opportunities. Having said that, he can do better, and if he’s going to fulfil his personal ambitions and opinions, then start putting in match winning performances against better teams. Tuesday night would be a great place to start.

Koeman’s tactics were interesting today – I expressed delight when I saw the side, Barry has a role as substitute in games like today but he can’t be seen as a starter in the really big games. Mirallas has long since ceased to be a starter for Everton in my eyes, although I appreciate the view of some that he at least gets up for games such as this.

It’s clear that Koeman doesn’t believe we can go toe to toe especially away from home against the top 6. His preference, probably determined by personnel rather than through choice has been to play defensively hoping to catch teams on the break. Sadly it’s not worked in any of the games against the top sides away from home this season.

This is a reflection of the inability for most of the squad to perform at the highest levels as individuals in these games, rather than a reflection of the system deployed. Almost all the goals conceded away to the teams above us have resulted from individual error by one, sometimes more individuals.

It’s not until the quality of individuals (mentally as well as tactically) improve through further strengthening of the squad, that we’re going to see significant uplift in performance in these games.

We’ve come a long way since the very dark days of last year’s Anfield debacle and the semi final – “the defining week” as Martinez put it, but we’ve clearly got a huge way further to go.

Being realistic, 7th in the Premier League is the level at which we are operating. We are currently the best of the rest, and that’s a significant improvement on the last two years but as we all know we need even further changes in the squad, the release of those not good enough, replaced by higher talents.

It felt like the wheels coming off our development project by the end of the game, and it always does feel terrible when losing to Liverpool. The truth is we were horribly exposed by injuries, we don’t have enough depth to our squad, but equally none of our players took the individual responsibility required to perform as part of a team.

When we have a team full of individuals who accept that personal responsibility that’s when we’ll start winning the games that really count, and then perhaps we’ll win some silverware.