Business as usual?

My recent articles have focused on the impact Covid-19 will have on football as a result of the likely economic depression arising from the pandemic. An economic depression is a period of sustained reduction in economic activity resulting in mass corporate failure, a huge reduction in trade volumes, very high rates of unemployment with the resulting impact on housing, spending, education and health, and in the situation we find ourselves now, all at a time before a viable vaccine is in place to beat a highly dangerous virus.

The global economy is going to shrink and shrink by a considerable amount. In the event the world’s major countries cannot return to some form of normal activity within 12 months, the OECD has predicted the following:

potential impact

The developed world, in which many have grown fat (literally and financially) on consumption, is going to discover what happens when people stop consuming.

In such a scenario, football faces a systemic collapse. As I’ve stated previously, football’s revenues are driven almost entirely by discretionary consumer spending. The clubs, commercial partners, sponsors and broadcasters all rely on ordinary people buying tickets, buying merchandise, buying food & beverages, buying the products of the sponsors and paying subscriptions to the broadcasters.

All of that stops, at best reduces significantly. Furthermore, what would probably be considered as the most resilient of income streams, match day revenues, won’t exist. It won’t exist because fans are not going to be allowed to go to matches for obvious reasons. Italy, unusually ahead of the curve, anticipates behind closed door matches until March 2021.

Even when the gates are re-opened, capacities will be reduced because of social distancing and from a revenue point of view, corporate hospitality will be much reduced – due to affordability, but also the behavioural change which the pandemic will create. Most people will not wish to voluntarily mix with large groups of other people in an unnecessary social/business environment. Until immunity through vaccination is assured that has to be an inevitable consequence.

Football itself, as a product, has changed – the game as a spectacle no longer exists as it did. Playing a game in an empty stadium is going to be a very hard sell to advertisers. Football has sold itself not only on the game but on the occasion. Pre and post match rituals will take a long time to recover. For years, there has been an aversion to the showing Premier League matches in stadia with even a small number of empty seats, but social distancing regulations will mean reduced capacities and half empty stadia at best.

Aesthetically unappealing, it reduces the value of the spectacle. One of the potential remedies to domestic broadcasters, almost certainly denied the season finale, is to offer more games next season as a means of mitigating refunds for this uncompleted season.

That requires some thinking though.

The last complete broadcasting cycle 2016-19 saw the Premier League receive €2,034 million per season from domestic broadcasters for 168 live games – valuing each game at €12.1 million.

The 2019-22 cycle agreed 200 live games for €1,884 million per season from domestic broadcasters (including Amazon) – valuing each game at €9.4 million.

Now in a scenario where all games in season 2020/21 are shown by Sky, BT and Amazon because stadia are closed to the general public, the value per game for domestic broadcasters falls to €4.96 million – that would be a 59% fall in the value of each match compared to the previous cycle. Even agreeing to the 200 games plus the 92 uncompleted games (as a way of compensation) reduces the value to €6.45 million.

Why is this important? It’s important regarding future rights negotiations – the broadcasters who are still in business, will want significant discounts on current costs. The broadcasters, both domestic but particularly the overseas, will be making the following calculations. What is the value of each game relative to the reduced number of subscriber and consequently advertiser revenues? Both elements of their value calculation are reducing, the question is not if or when, but by how much?

Equally, the value of sponsorship and commercial deals are directly related to the value of broadcasting deals. A fall in the broadcast value leads to a fall in endorsement value.

Remember that the growth in Premier League broadcasting revenues, in recent years, has come from overseas broadcasters. Currently, overseas broadcasters contribute 45% of all revenues equating to £1.4 bn per season.

However, if the Premier League reduces the broadcast value of each game (as above) it is reasonable to expect those overseas broadcasters still in business would demand similar cuts. A 30% cut represents £420 million (approximately £21 million per club), a 50% cut £700 million (approximately £35 million per club).

Whatever the final negotiations, broadcast income (and therefore other endorsement iincome) will fall in the future.

Everton

Before projecting the impact of the above on Everton, an understanding of where we might be currently is necessary. Obviously certain assumptions have to be made, but I hope you will find them reasonable:

Projected Profit and loss account:

Here are two scenarios. In common, they include the £30 million naming rights option received from USM (booked as commercial income) and a projected £59 million profit contribution from player trading. Operating costs have been reduced by 20% to reflect the lack of activity in the final 4 months of the year.

“m1” assumes that broadcasting revenues fall by £40 million based on £760 million recovered by the broadcasters from the Premier League. “m2” assumes a small change in broadcasting revenue reflecting the reduction in games broadcast domestically involving Everton.

P&L projected

Using the lower loss figure would produce aggregate losses since 2017 (Moshiri’s first full financial year) of £154.3 million. Included in that is £229 million of player trading profits and the £30 million windfall from USM.

This, in the biggest bull market football has ever experienced.

What is interesting and perhaps most relevant in the current environment is to look at the movement of cash in the business in the last year.

As of end June 2019, Everton had £27.4 million of cash in the bank. We had external loans of £36.4 million of which £17.9 million was to be repaid in July 2019 and the remaining £18.7 million (plus interest) in July 2020.

Included in this figure is £4 million of payments received for 2019/20 season ticket sales. The figure for this year’s accounts will be lower given the payment holiday extended by the club.

We had trade debtors (monies due to us) which is almost entirely transfer fee instalments of £51.8 million due this financial year and £28.5 million subsequently.

Trade creditors (monies due to be paid by Everton) amounted to £73.5 million due this financial year and a further £34.4 million subsequently.

Assuming trade debtors and creditors have been received and paid this year results in a net outflow of cash of £21.7 million.

We were active in the transfer window during the summer of 2019. Net spend is important in calculating cash flow. Our net spend was £35.5 million. If we assume we paid and received an initial 50% of transfer instalments that would see cash outflows of £17.7 million.

From the projected Profit and loss accounts, projection m1 would show cash outflows of £43.6 million, and projection m2 outflows of £5.5 million.

In total, the club has projected negative cash flows of £62.8 million assuming no recovery of broadcast revenues. In the unlikely event of broadcasting cash recovery falling into this financial year then the negative cash flow would rise to £100.9 million.

The question then is how is this funded? The accounts published in January show that Moshiri made an additional loan of £50 million in the period between 1st July 2019 and January 2020.

Additionally Everton replaced their previous credit facilities with ICBC with a facility provided by Rights and Media Funding. The level of funding under this agreement will not be known until the next set of accounts are published.

Even on the highly optimistic assumption that revenues remained constant it is clear from the above, that without a significant reduction in future costs, the club can only operate with the considerable financial support of Farhad Moshiri and an extension of credit facilities.

Reduce costs

In the likely scenario of a significant reduction in revenues then the situation obviously becomes worse. It can only result in an enormous reduction in our cost base. That is difficult to achieve. It can only be achieved by a reduction in the number of people employed by the club, particularly players, or by a significant reduction in player wages or most likely both.

It is not business as usual. The cost base of the club has to be addressed. That is inevitable. It’s inevitable from a regulatory point of view (even if there’s a temporary relaxation to reflect the extraordinary circumstances currently) but more importantly for the club’s future solvency.

Everton are not alone in this respect. Every football club has to be doing the same analysis. The game faces a systemic crisis and even for the biggest clubs to survive, they must start taking action.



Categories: Everton, Everton finances

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