Everton’s January transfer window driven by regulations or pure financial sense?

There has been much talk in the media both locally and nationally regarding Everton’s ability or willingness to acquire new players during this January window.

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Brands commented at the Annual General Meeting on the unlikelihood of doing business in the January window and in his most recent pre-match press conference, Marco Silva  was quoted as “We don’t have the financial conditions to go into the market at the moment, I have to find different solutions. We will only be using the market if we sell one of our players, but that doesn’t mean I am looking to sell to raise funds.”

It has been suggested the financial conditions referred to by Brands and Silva related to what is commonly called “financial fair play” (FFP). In the strictest sense, Everton as non-participants in European competitions this year are not under the jurisdiction of UEFA’s FFP regulations but if we are to qualify next season our financial performance this year would be relevant once more. However, we do obviously fall under the Premier League’s own financial regulations namely Short Term Cost Control and Profit & Sustainability rules.

Short Term Cost Control (STCC) was designed to hold back the increase in player wages, and Profitability and Sustainability rules providing a cap on the maximum losses permitted by a Premier League Club.

Short Term Cost Control:

The current STCC rules have been in place for 3 years and expire at the end of this season. From the PL Handbook, Rules E.18, E.19 and E.20 cover STCC. Essentially they permit clubs to increase wages year on year by a maximum of £7 million p.a. covering the three seasons 2016/17 through to 2018/19. There is however scope to increase wages using “club own revenue uplift”

Club own revenue uplift (CORU) includes all increases in revenues other than broadcasting revenue, so includes match day, commercial/sponsorship and importantly the average player trading profits over a rolling 3 year period.

As is clear from the accounts wage growth at Everton has been enormous in the time since Moshiri acquired his initial 49.9% shareholding. However the question that needs answering is whether the STCC regulations would permit our wage bill to grow from last year’s £145.5 million.

In order to grow we would have to see growth in non-broadcasting income and/or use player trading profits to justify increase over £7 million.

It is difficult to see any scenario where the non-broadcasting income for 2018/19 will be greater than the previous year. Therefore there will be no “contribution” from this source.

If we look at player trading, we have to take the average of the last three years including the current year 2018/19. The two preceding years have seen huge trading profits, £51.9 million (2016/17) and £87.8 million (2017/18). Trading activity has not concluded for 2018/19 but based on the selling of Klaassen and Funes Mori in the summer we will show a small trading loss of around £2 million.

Therefore the average for the three years is  approximately £46 million (assuming we sell no-one in this window).

Thus under STTC rules, theoretically Everton could increase wages this year by another £53 million in 2018/19 and still be compliant. Clearly as you will see when looking at our projected profit and loss account for this year, we will not be doing this. The objective is to lower the wage bill following the enormous and wasteful increase in previous years, but this calculation demonstrates that STTC is not a barrier to wage growth.

Profit and Sustainability Rules

The Profit and Sustainability Rules are covered in the PL Handbook, sections E.53 to E.60.

This section of rules lays out the required responses from a club dependent upon the size of aggregated losses over a rolling 3 year period.  The loss figure used in the calculations are different from the published figures in each club’s accounts as they do not take into account expenditure on club academies nor expenditure on stadium development.

The maximum permitted loss (rule E.59) is £105 million over the preceding 3 years. Above that figure a club would be considered to be in breach of the rules.

Everton’s accounts show the following: 2016/17 profit £30.6 million; 2017/18 loss -£13.1 million. From that we can remove stadium costs (approximately £22 million) and academy costs (I’m going to estimate at £5 million a year).

That gives a positive balance of £49.5 million

Projected losses for 2018/19

Everton’s accounts for 2018/19 will not be published until much later this year, several months after the financial year end of May 2019. However it is possible to estimate what the final figures might be.

2018/19 will show record losses for the club. With our wage bill remaining high, amortisation costs increasing, a reduction in turnover, continued expenditure on Bramley-Moore and a small negative contribution from player trading I estimate we will show a loss of around £85-90 million for the full year.

This figure assumes we do not sell anyone in this window but perhaps one can see the temptation to sell Gueye at a substantial profit in order to recover some of the projected losses.

Even a loss of that magnitude will not see us breaching the upper limit set in the current profit and sustainability rules – our 3 year aggregate having removed the permitted stadium and academy costs would be less than -£40 million.

It does however demonstrate the absolute requirement from a purely commercial perspective to reduce costs especially player wages and the removal of a large number of non-contributing but hugely expensive signings made in the years 2016, 2017 and January 2018 window.

It also leaves us in a tighter position going into the financial year 2019/20, however rules beyond 2018/19 have yet to be published

UEFA Financial Fair Play

UEFA’s rules allow losses over a three year period up to €30 million per year if the excess is covered entirely by a “direct contribution/payment from the club owner(s) or a related party”. Moshiri’s capital injections meet this requirement. They also permit the removal of stadium and academy costs. If we were to qualify for European competition next year we would not fall foul of their regulations.

Conclusion:

As I stated in my review of the club’s accounts the excesses of the last two years are unsustainable. Our cost base is too high given our revenues, and it is unrealistic to expect the majority shareholder to continue to fund operating losses whilst at the same time be preparing to fund a significant element of the capital costs of building Bramley-Moore.

The reasons for the club’s reluctance to enter the market this January are very clear. The “financial conditions” referred to by Silva are on the basis of very obvious commercial considerations. They are not per se driven by compliance issues relating to the Premier League and UEFA’s financial regulations.

1 Comment

  1. In a nutshell Paul, it won’t be Premier league or UEFA regulation’s that stop us investing in further team/squad additions in January, simply a pressing need to ‘balance the books’? I still think we are recovering from the absolute folly of allowing the Koeman/Walsh regime almost unlimited funds during their disastrous tenure.

    Looks like we will muddle on to the end of the season. In the interim, tensions will continue to grow between the fans, the team and Silva unfortunately, unless we see a sustained upturn in form.

    It doesn’t look promising.

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