April 12, 2017
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:
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:
|Stadium utilisation %||96.5%|
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|
|Stadium utilisation %||95%||95%||95%|
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.