There’s a lot of change coming at Everton
It’s almost two years since Farhad Moshiri acquired 49.9% of Everton Football Club, to be precise February 27th will mark the two year anniversary.
What an interesting two years it has been! It’s been far from plain sailing on the pitch despite the record levels of transfer spending, and wage costs reaching levels undreamed of in previous years. The club has visibly struggled to come to terms with its new-found wealth, wealth brought about by the combined effects of capital injections from Moshiri, and of course, the huge increase in broadcasting revenues. The disruptive effects of 3 management changes, the loss of key playing personnel to rivals, and the largely unimpressive performances of new arrivals is still being felt. In addition the adoption of a Director of Football model whilst both welcome and necessary in the long term, has yet to settle, compounding the problems above.
Off the pitch there’s been, as mentioned above, huge changes in the finances of the club. I’d like in this article to address the impact of those changes moving forward.
As recorded in the 2016/17 accounts Farhad Moshiri has provided £150,000,000 of funding to the club, repaying existing debt, repairing the balance sheet and providing much needed working capital. In the last accounts, this capital injection is treated as equity, meaning that it is not anticipated that the company will ever have to repay this sum.
With the stadium financing about to become the key phase prior to the submission of the planning application it is worth considering how this will all pan out.
Let’s start with the current shareholdings:
Everton have 35,000 shares issued and are currently held by the following (as per the last published accounts):
|Blue Heaven Holdings Limited*||17,465||49.90%|
*Farhad Moshiri is the 100% beneficial owner
Moshiri to become new majority owner?
It is known through public documents in the Isle of Man that Farhad Moshiri has options agreements with Bill Kenwright, Jon Woods and Arthur Abercrombie.
The exact terms of the options are not known, including the value that the shares change hands for, as they are kept private, but it’s a reasonable assumption to believe that the options will be exercised before the financing of the stadium (I will explain below).
Arthur Abercrombie is believed to hold 909 shares following the sale of 53% (1025 shares) of his original holding to Farhad Moshiri in February 2016.
On the basis that Kenwright, Woods and Abercrombie dispose of all their remaining shares in favour of Blue Heaven Holdings then, Blue Heaven Holdings Limited will have a total of 25,746 shares, making Moshiri the new majority owner of Everton Football Club holding 73.56% of the issued shares.
As I’ve discussed on several occasions in different articles, the increase in turnover, the strengthening of the balance sheet, the underlying profitability, plus the inflationary effects running through football will have significantly increased the value of the football club.
Using the Markham methodology puts the value of Everton Football Club at around £420 million, my own valuation method places a much more conservative £280 million valuation.
If we look at the midpoint between both valuations we arrive at £350 million, equating to £10,000 a share.
Converting the Moshiri capital injection into shares
With the exercising of his options, Moshiri through his majority position has control of the club. It’s a reasonable assumption that Moshiri will want to convert his £150 million capital injection into shares. If he was to do so at a valuation of £350 million (see above), ie £10,000 per share, then in accordance with the Articles of Association, a properly convened General Meeting could issue a further 15,000 shares to Moshiri. The shareholdings would then look like this:
|Shares issued||50,000 (100%)|
|Blue Heaven Holdings||40,428 (80.86%)|
As discussed here, we are moving close to the completion of an anticipated £280 million loan from Liverpool City Council to partially fund the development of the stadium at Bramley Moore.
Whilst it is impossible to accurately address the final costs of the stadium a ball park figure of £500 million is assumed to be reasonable.
Thus an additional £220 million or so must be found from other sources.
It is hoped that a naming rights deal will contribute to the overall cost either by way of a single capital payment or the payment of annual sums to assist meeting the debt servicing costs.
As has been discussed previously, the naming rights market is difficult in the UK. It’s likely we will find a partner but I think the realistic value of the deal will be significantly lower than many of the projections made elsewhere. A deal to the order of £6-10 million per annum would be a significant achievement. I’m going to assume that there is no initial lump sum payment by the partner.
Thus the only remaining source is a further rights issue.
This does not have to happen immediately. The securing of the Liverpool City Council deal and the promise to fund any future shortfall by Moshiri is likely to be strong enough not to raise any concerns during the planning process.
Thus subject to planning approval, the main work on the stadium could be started prior to any rights issue.
How would it be priced?
I guess that depends upon when exactly it would be called upon. But on the assumption that it would fall within the next 18-24 months, based on projected accounts for the year 2017/18, the club would have a valuation of £450 million based on Markham and £325 million based on my own valuation method. A figure of around £400 million might be a reasonable assumption.
On that basis, Moshiri could acquire another 25,000 shares at £8,000 a share (shares in issue would be 50,000 prior to the second rights issue). The assumption is that no other shareholders take up their rights to subscribe for additional shares.
That would leave Moshiri owning 65,428 of the then 75,000 issued, resulting in 87.2% ownership. This is a significant figure given it is below the 90% level, meaning existing shareholders can continue to retain their existing holdings. To be fair to Moshiri, he has said consistently he wishes for smaller shareholders to retain their ownership of the club.
Obviously, as with all projections, there is a lot of assumptions built into the forecasts. However what is clear is that majority ownership will come the way of Moshiri after the exercising of the options, and that will permit him to convert his capital injection into newly issued shares. From that point he can control the future issue of shares to fund the remaining stadium development costs.
The two years have been difficult years for us, the supporters, yet behind the scenes the club has financially and in terms of the new stadium made huge and significant progress. The marketing slogan “things will never be the same again” soon after Moshiri’s arrival was perhaps premature, but we are unrecognisable from the position we were in two years ago.
The next stage is about to begin, and I suspect the pace of change will increase significantly both in terms of finances and personnel. It’s not going to be dull!