Football has become a game of absolutes – almost everything related to football is either appallingly bad or amazingly good. Depending on which team you support, the result, how we played, who the opposition are, the performance of the referee, the atmosphere and even the manager’s press conference usually falls into one of the two categories. There’s no middle ground.
A couple of signings, a couple of “clean sheets” and we are world-beaters. Miss out on a target and a slow start to the season, the reverse is true and both Brands and Silva are frauds.
It is in this context then that the proposed move to Bramley-Moore dock should be viewed. The rather minimal information provided by the club has predictably been met with almost universal acclaim.
Rather like the huge political story of leaving Europe, we are being asked to buy into a whole new destination and a new commercial relationship with our club without any meaningful explanation of how we get there, what it will look like (I’m not talking about visuals) when we do, and what the costs are.
Is that harsh? Possibly, but let’s strip out the emotion for a few minutes and look at the reality. The reality of the club’s current finances, the potential cost of Bramley-Moore and the financing/funding options.
The club’s finances
Despite the £250 million invested into Everton by Farhad Moshiri, despite over £210 million of player trading profits (and still counting) between 1st June 2016 and present day and projected accumulated revenues of over £720 million to the end of June 2020 we trade with significant losses.
Let me put some accounts and projections out there (projections for financial years 18/19 and 19/20. I have not adjusted the extended 18/19 financial year other than include the Vlasic sale in 18/19 financial period. The accounts when published will look a little different as they will extend to end of June 2019) The 19/20 figure uses the current player trading profit which obviously could change with further disposals:
|Profit & Loss (£’000’s)||31-May-17||31-May-18||30-May-19*||30-Jun-20*|
|Other operating costs||39,184||36,829||40,000||40,000|
|EBIT||– 12,302||– 64,050||– 94,000||– 81,000|
|Profit on player sales||51,945||87,786||13,000||60,000|
|Profit before interest tax||32,677||– 10,226||– 93,000||– 33,000|
|Net interest||– 2,017||– 2,844||– 2,000||– 2,000|
|Net Profit (loss)||30,660||– 13,070||– 95,000||– 35,000|
Our current business model doesn’t work. Our cost base is way too high relative to our income. We are reliant upon player sales for our future sustainability.
|Profit on player sales||51,945||87,786||13,000||60,000*|
Major permanent transfers out:
2017/18: Lukaku, Deulofeu, Cleverly, Barkley
2018/19: Funes Mori, Klaassen, Browning
2019/20: Gueye, Lookman, Vlasic, Onyekuru, McCarthy – to date*
I say that because in the absence of a totally unforeseen change in our commercial performance, our two other principal income streams, broadcasting revenues and matchday income will only see marginal improvements at best. Meanwhile, our wage expenditure and amortisation cost will continue to outstrip income.
|Squad cost to turnover ratio||83%||112%||129%||120%|
Despite all the attempts to reduce squad size, and to be fair, we currently have a net 18 players having left the club this summer, the majority have been junior players and loans. Much of the core “deadwood” inherited from the Koeman, Walsh and Allardyce era continue to provide a drag on the business. Schneiderlin, Bolasie and Walcott are contracted until 2021 and Tosun 2022. Martina and Niasse until 2020. In terms of wages and amortisation costs this fine cohort of players costs the club in excess of £40 million a year.
So against a background of broadly static income and huge squad costs the club must fund a stadium with anticipated costs of between £500-600 million.
What do we know so far?
We know the stadium will be largely financed by debt, and that the proposed capacity is 52,000. Clubs move stadia for many reasons. In Everton’s case it is to replace the much loved but out-dated Goodison Park. It’s also a springboard for a new commercial world to operate in. Or at least that’s how the theory goes. Commercial deals not available to us currently will become more likely with a brand new stadium in an iconic location. There’s also the “halo” effect making the club more attractive to potential new signings. However the stadium must also be able to stand on it’s own two feet financially in order to be viable. Although I have spoken about this before it is worth revisiting.
How do we generate considerably higher incomes in a stadium with a smaller capacity than might have been expected, a not entirely ambitious number of premium seats, seemingly a commitment to affordability, yet with a substantial debt burden?
There’s a common misconception that match day revenues are not so important given the huge broadcasting deals, European revenues and commercial income growth. If that’s the case why is it that the two most successful Premier League clubs from a commercial growth perspective (Tottenham and Liverpool (to a lesser extent)) have invested heavily in a new stadium and increased capacity and facilities? Both clubs are seeing huge income growth from their stadia over and above the cost of a new build or partial redevelopment. For example Tottenham will have a current interest cost on their existing debt of approximately £16 million per annum. That compares to an increase in match day revenues of more than £60 million. Plans to reduce the debt to £400 million by 2022 will further reduce the interest cost of funding their development.
How likely is it that Everton can do the same?
As mentioned previously, Everton expect to borrow £350 million from a financial institution or group of institutions. The remaining funds required (£150 + million) is expected to be provided by Farhad Moshiri through equity or some form of mezzanine funding, the detail of which is not in the public domain.
Whilst interest rates are extremely low and are likely to remain low for the considerable future it’s difficult to see Everton attracting initial funding below a rate of 5%. If that is the case, then simple maths suggest an interest cost of £17.5m a year. I will assume we make no capital repayments but look to refinance the stadium in a similar manner to Arsenal and Tottenham through a bond issue.
Current matchday receipts at Goodison are less than £20 million a season.
|Matchday Income £000’s||17,900||17,600||14,100||16,300|
Matchday income per head for 2017/18 is a fraction over £18 per head.
Taking the interest cost of £17.5 million, adding the last matchday income figure of £16.3 million gives a figure just under £34 million in total matchday revenues to stand still. But we surely want to increase revenues? The Kirkby stadium proposals back in 2009 only suggested even then a paltry £6 million increase on the then Goodison revenues.
Assuming that remains the base case for the new Bramley-Moore what impact does that have on paying spectators to reach the figure?
I’ve argued consistently that a lower capacity Bramley-Moore leads to significantly higher ticket prices. In the above scenario matchday revenues would be £40 million per annum, less than £23 million after financing costs.
As I demonstrated, at length, here even to reach £40 million would require ticket price increases in excess of 40%.
Simply put, affordability and a relatively low capacity stadium funded by predominantly by debt provides marginal improvements in revenue at considerable cost to the paying spectator. As Dave Kelly said in his excellent contribution to The Athletic article earlier this week”the fans will pay for it”.
There’s two other points I’d like to make about capacity. I’ve heard the explanations about the last X thousand seats being the most expensive and the lowest yielding. So how does that sit with a vague suggestion that capacity could at some point reach 62,000?
Surely in order to do so, much of the expense in putting in extra capacity will occur at the time of building? The size of the concourses, the number of entrance and exit points, the number of toilets etc would all have to be planned for the larger (unspecified) future capacity? Thus we will have sunk scarce resources into building a size of infrastructure which may never be used?
Secondly, what is missing from the business case for 62,000 now that will become apparent at some time in the future?
Finally there’s the point about demand. There’s huge evidence from other stadium moves of the growth in demand by moving stadium. I could argue that innovative ticket selling strategies such as used in other sports elsewhere in the world would attract more fans to the stadium. There’s also the latent demand from Evertonians who will not go to Goodison to sit in some of the worst accommodation and with the worst views in top class professional support.
I know the club are adamant that their professional advisors believe 52,000 to be adequate, but I’ll ask the question that I’ve asked previously – on what basis was this analysis done? Who was asked? What pricing points were tested to see when demand falls off because of affordability issues? I don’t know a single Blue that has been asked these questions despite the consultation processes.
I started by talking about football now being a game of absolutes with almost no middle ground. Whilst I am critical of the club, I’m certain they have their justifications and answers for the questions I pose.
My point is though that just as all is not bad, it’s not necessarily the case that all is good.
There’s a huge weakness in our business plan that necessitates the constant trading of players to remain sustainable in the future. As things stand Brands’ comment on 2 or 3 players coming in and out each year are largely accurate I believe, but it will be the case of 2 or 3 significantly valuable players being sold and less expensive players bought in order to balance the books.
Against that background it’s difficult to see a smaller than could be Bramley-Moore, largely funded by debt making a significant financial contribution.
The club looked for as many comments on Bramley-Moore as is possible. There are positives of course, such as the exterior design and the bringing of life back to a desolate part of the City. The consultation will demonstrate huge public support for what is proposed. But to conclude I believe the current business continues to suffer from the poor decisions made in the recent past and needs serious improvement. Finally, the capacity and funding model combined will not bring the financial benefits enjoyed by our peers following their new stadia and/or redevelopment.
Categories: Everton finances
Great article, lots of valuable content here and I’m very intrigued by your thoughts surrounding Bramley-Moore.
My initial hot take here is that while you touch on player sales and how they can deliver future sustainability, its clear that our short term plan is asset building through astute trading. The DoF has lucrative insider links and he understands the art of bargaining, Marco Silva is an excellent trainer and he has shown a craft for cultivating player talent. Beyond that the club itself offers a near perfect incubation for young talent, a play-style similar to the top sides and just the right amount of pressure and expectation.
The sale of Gana Gueye this summer was as much about defining the selling culture of the club to major agents, as it was anything else. No supporters want to hear that we are positioning ourselves as a selling club, but this should not be looked at as a negative. Ajax, Porto and Benfica have vastly increased their assets using this technique, Everton can join that list.
Thanks James for your comment. I agree and have no objection to using players as commodities. My concern is that the underlying business is cot even close to break even so the selling of players maybe done out of necessity rather than a prudent time to trade assets. The club has to increase turnover both through the gate at Bramley -Moore but also through greater commercial revenues and regular participation in Europe
Thats worryingly true looking at your figures, I knew there would be consequences to our very poor trading under Walsh and Koeman but the news keeps getting worse. Its criminal those deadwood players are costing us 40m a year on the balance sheet, I would imagine its keeping Brands up at night!
On a side note, are Spurs generating the majority of that additional revenue through higher gate sales and ticket prices? Or is it coming from other streams?