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:
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!