The more things change, the more they stay the same…..

Much has been spoken about Everton’s approach to this transfer window, the first full summer window for which Brands & Silva will have had the opportunity to plan well in advance.

Whatever plans they have must be put into the context of Everton’s financial position. Therefore, I thought it useful to look at what’s occurred financially since Moshiri’s involvement in Everton, our likely current position and with one eye on profit and sustainability rules in the Premier League, a look at the financial year just started.

Moshiri initially acquired 49.9% of Everton’s shares in the late February of 2016. After more than a decade under the ownership and direction of Bill Kenwright, as is well documented, Everton’s finances were in a parlous state. Heavily indebted with a combination of short and long-term debt totaling £57 million and a net loss for 2015/16 of £24.3 million, Moshiri’s arrival was critical in its timing. The negative value of the balance sheet (-£43.4 million) reflected the lack of capital and years of accumulated losses.

The assumption was that Moshiri would not only provide much needed capital but bring in the commercial expertise needed to grow the business providing much needed funds for improving the quality of the squad. In his first public announcement, he also made it clear that one of his greatest priorities would be to find a new home away from Goodison Park:

Moshiriweb2

The next three years proved to be interesting, never boring (other than some of the football) resulting in great change on and off the pitch with many expensive mistakes in recruiting players and managers. I don’t propose going through that now in detail but just to highlight the financial aspect of this time.

Here’s a summary of the published accounts from 2016 through to 2018:

Profit & Loss £000’s 31-May-16 31-May-17 31-May-18
Matchday         17,625         14,064          16,316
Broadcast         82,500       130,535       130,000
Commercial/Other         21,416         26,731          42,843
Total income        121,541       171,330       189,159
Wages         83,985       104,655       145,479
Other operating expenses         30,428         39,184          36,829
EBITDA            7,128         27,491            6,851
Depreciation           1,842           2,495            3,968
EBITA            5,286         24,996            2,883
Amortisation         22,398         37,298          66,933
 EBIT  –      17,112 –      12,302 –       64,050
Exceptional costs         11,335           6,966          33,962
Profit on player sales           7,815         51,945          87,786
Profit before interest & tax –      20,632         32,677 –       10,226
Interest income           1,354           1,801            3,094
Interest expense           5,055           3,818            5,938
 Profit before tax        24,333         30,660 –       13,070
Tax expense                  – –               50                  26
 Net profit (loss) –      24,333         30,710 –       13,096

Points to note would be the increase in revenues mainly due to higher TV revenues and participation in the Europa League in 2017/18, increase in wages and amortisation (see below) and a large increase in exceptionals including former manager compensation and the costs associated with Bramley-Moore preparation. The impact of very significant  investment in players can be seen below:

Transfer Activity (£ millions):

Value transfers in Value transfers out
2015/16 (pre Moshiri) 44.01 9.9
2016/17 77.31 54.72
2017/18 182.88 113.83
2018/19 89.82 25.79
2019/20 22.5 14.13
Total 2016-present 295.2 153.75

As a result of the transfer activity, wages and amortisation costs have grown substantially. I have included the estimate for 2018/19 as that becomes relevant when looking at the transfer activity for this window and season:

£’000s Wages Amortisation Total % of turnover
2015/16 83,985 22,398 106,383 88%
2016/17 105,655 37,298 142,953 83%
2017/18 145,479 66,933 212,412 112%
2018/19 Estimated* 140,000 85,000 225,000 129%

Working capital

When Moshiri first arrived a lack of capital was a serious issue for the club. The huge expansion of investment and the associated increased cash and non-cash costs, combined with limited meaningful increases in revenue have returned the problem.

The increased investment in players and the resulting increase in wages plus the costs associated with Bramley-Moore, has meant the £250 million provided by Moshiri and the substantial player trading profits (circa £148 million over three years) have not proved enough to meet the club’s capital requirements.

The club had its external debt cleared initially by Moshiri in 2016 but since has had to return to borrowing from external sources. The last accounts showed £75.188 million of external debt (ICBC and Santander) and £9 million of cash. Despite Moshiri having provided an additional £100 million since the last accounts, as I will demonstrate we will continue to have a net debt position. Whilst that in itself may not be overly problematic long term, it will affect our ability to trade in the transfer market especially with a stadium to fund in the near future.

Financial years 2018/19 & 2019/20

So far I have dealt with the known position as published in successive accounts. In order to understand our current position I can only use forecasts as the accounts for 2018/19 will not enter the public domain until the very end of the year. However, as long as a reasonable margin for error can be accepted it’s possible to give a reasonable view of the last financial year and the current:

The main points are as follows:

  • Turnover falls due to non participation in Europa League – itemised in reduction of commercial income (see below)
  • Wages fall slightly
  • Assume other operating costs and the exceptional costs relating to Bramley-Moore remain broadly constant
  • Amortisation costs increase significantly reflecting transfer activity
  • Player trading profits fall substantially
  • For ease of calculation no change in accounting date but have included June transfer activity

On that basis my projected Profit and Loss account for 2018/19 looks as follows:

Projected Profit & Loss (£’000s) 30-May-19
Matchday         15,000
Broadcast       130,000
Commercial/Other         32,000
Total income        177,000
Wages       140,000
Other operating expenses         39,000
EBITDA  –         2,000
Depreciation           4,000
EBITA  –         6,000
Amortisation         85,000
 EBIT  –      91,000
Exceptional costs         12,000
Profit on player sales           9,000
Profit before interest & tax  –      94,000
Interest income           2,000
Interest expense           4,000
 Profit before tax  –      96,000
Tax expense
 Projected Net profit  –      96,000

I’m happy to accept that these are projections and I’m sure there’s a reasonable margin of error, however it is clear that 2018/19 will produce a record loss for the club. The enormous increase in squad costs plus the costs associated with Bramley-Moore have not been met with increases in income and have been exacerbated by the failure to qualify for Europe. It’s important to note that fresh injections of capital alone apart from reducing interest costs do not impact the profit and loss account.

Cash flow

Companies can, of course, assist their cash flow by altering the balance between trade creditors and debtors. In the case of football clubs they can perhaps adjust payment terms so that they receive funds from transfers more quickly than they pay sums owed for incoming players.

Assuming we have maintained that balance fairly constant, and given Moshiri’s capital injection we still have headroom with our cash and credit facilities. In addition, we will have received the latest installment due to us from Manchester United (albeit payable to Santander) of circa £18m which reduces our indebtedness to Santander.

Transfer activity

However, and this is the crunch, we are not in a position to spend hugely in the transfer market unless we have significant out goings in player sales (or very unexpectedly large increases in commercial income).

The reason for this is quite simple. The greater our expenditure now (assuming we have the capital available which is limited as above) the greater the impact on the 2019/20 accounts.

The 2019/20 profit and loss account will in the absence of significant player sales or unexpected income, look quite similar to 2018/19, with a similar scale of loss.

Now it’s possible that with astute player sales, the 2019/20 P&L loss can be reduced by a fair amount. Sales of players such as Gueye, Lookman, even McCarthy will generate profits without overly affecting our core squad (I’d love to keep Gueye but at his age the potential profit may be too tempting).

Impact of transfers on P&L

Let’s take Zouma for example – a £30 million transfer and £100,000 a week 4 year contract would increase the losses in 2019/20 accounts by £12.7 million (£7.5 million in amortisation and £5.2 million in wages).That’s a real consideration as you will see below:

Profitability and Sustainability Rules

The Premier League rules are very clear. The maximum permitted losses over a three year period are currently £105 million. How they calculate the losses is slightly different from what appears in the accounts. For example, the cost of academies and any costs on stadium development or improvement can be deducted.

If we assume we’ve spent £1 million a month on Bramley-Moore to date, and that the academy costs £4 million a year, over three years that would add up to £48 million.

By my estimates (again I accept there’s a margin for error) without profitable player sales or a significant increase in income in 2019/20 our accumulated losses after removing Bramley-Moore and academy costs (£48 million) are in the order of £155 million, potentially £50 million above the permitted losses.

Those excess losses can be covered by player trading profits, I’m not suggesting we are breaching Premier League rules. I also accept that there may be a margin of error that reduces those figures further.

Conclusion

However, I am saying that it is unlikely in the extreme, that we will see significant inward transfer activity involving highly valued players. Even if Moshiri committed to funding through additional capital injections, that does nothing to help the Profit & Loss account situation which by my calculation must be a critical consideration.

As ever, I’m only expressing my view of our current financial position. I am very happy to make good any errors or omissions, but I believe the above accurately represents the position we are in.

We still have the opportunity for a fantastic future ahead of us, and in Brands future recruitment will be of a quality greater than we’ve ever had before.However we need to address the legacy issues of the period 2016-January 2018 to move forwards.

Plus ça change, plus c’est la même chose!

 

 

6 Comments

  1. Thanks Esk,
    this article amounts to a rather sobering appraisal of the financial standing of the club, and from how I read it, the potential effect upon our activity in the transfer market could be stark if not extremely limiting.

    We can but hope that the margin for error in your figures is either greater than you allow for, or that from somewhere, Marcel Brands can find suitors for the likes of Bolasie, Besic, McCarthy, Mirallas, Niasse, Ramirez and others who are highly unlikely to ever make regular contributions to the first team.

    A different era I know, but I note back in 1986/87 when we last lifted the league title, only 20 players appeared in more than 10 games all season… maybe it’s time that with no European competition, we looked to trim the already overloaded squad even harder than many of us feel it needs to be trimmed.

  2. Hi Paul, another interesting analysis of our current financial state of health. One thing is patently clear, we are just not generating enough income either from within or outside the club (external revenues/partnerships) to help us with our ambitious plans to move the club forward, either with developing the current first team squad, or being able to finance the new ground move, particularly with the project due to go to the planning stage in the latter part of the year.

    It’s worrying also, to realise another injection of Moshiri ‘capital’ won’t provide a solution to the problem in the short term. I wonder if the club might be best following the example of Spurs, who dampened fans expectations over the last couple of years, by promising them an ultra modern, state of the art stadium, whilst being conservative in the transfer market?

    Obviously, the big advantage Spurs had was having a manager of the calibre of Pochettino, who somehow managed to progress into the top four of the Premier league on a regular basis, whilst happily rubbing shoulder’s with europe’s elite in the Champions League. An astute move by Daniel Levy, who just about got away with his great illusion trick as far as the fans were concerned. I’m not sure Moshiri and Silva would enjoy the same ride with the Everton fans if we finish eighth or ninth again in the next two or three years.

    I think Moshiri needs to step forward at some point and look and act like a man with a real vision for the club. He stirred people’s emotions a few years ago when he declared ‘the club must not become a museum’. Now is the time for BOLD leadership, let’s hear it as it is, warts and all.

    Although the project that is BMD is really positive for the club in the short and long term, the good ship Everton still has some choppy water’s to navigate, but we need clarity and senior people at the club to be brave and honest in their outlook for the next 12/18 months.

    1. Thanks Steve. Your final 2 paragraphs sum up the situation brilliantly.
      The opportunities still exist including BM but we need boldness and candour. We have a highly knowledgeable fan base, amongst the best in that respect. We deserve honesty and openness

  3. Hi Paul. I have no idea what amortisation means and I had a strange few minutes imagining what EDITBA meant. No wiser. The figures and the charts are not things I can read. The prose on the other hand – is passionate and fear-filled and with all too good reason. We drift. My great fear is that the playing squad all too perfectly reflects the boardroom. Too much dead wood. I wish you were a good deal nearer being heard, mate.

  4. Brilliant analysis as ever Paul.

    I hope we can clear out some of the deadwood and get in a decent striker, right back and Zouma or an equivalent centre half at the very least.

  5. Brilliant analysis, the numbers here make me very concerned about our potential in the transfer window this summer. It’s interesting to hear from the echo today that we are in for Pepe (£60 million rated)

    Presumably we are hoping to make significant player sale profits to allow for such signings. If not can we get around ffp another way? Obviously Man City use inflated sponsorship deals from their Abu Dhabi based ownership, could we see similar from Moshiri/USM?

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