With the news we have agreed terms with Napoli over Allan, I thought it may be of interest to cover how we fund transfers and account for them.
The need to improve our squad, particularly in midfield is obvious to all. There is complete agreement among Evertonians as to the need to bring in quality players. Preferably, players that meet Brands’ requirements in terms of age, price and future value, whilst also meeting Ancelotti’s more immediate need of putting quality onto the pitch, quality which can understand, relate to and perform in line with his expectations and tactical requirements.
Both Brands and Ancelotti will be aware of the legacy issues facing the club. A largely over-sized, over-priced, under achieving squad (albeit with exceptions), plus financial constraints, real (ie cash flow) and regulatory (Premier League profit and sustainability constraints). These problems are compounded by the impact of the Covid-19 virus with reduced income in the last 5 months, most likely this next season and an increased risk to future income.
So let’s deal with the finances first.
Profitability & Sustainability
The Premier League permits aggregate losses of £105 million over any three year period. The calculation for permitted losses allows for (without penalty) expenditure items such as women’s football and community expenditure. Therefore, the figures presented to Premier League will be different, to a degree, to those in the published accounts.
The rules require all clubs to produce forecasts. In March of this year (2020) Everton will have produced a set of figures looking at the previous 2 years (2017/18, 2018/19) and projected figures for the full financial year 2019/20 ending June 30th 2020.
The projected figures are not in the public domain, however it’s not overly difficult to calculate, within a reasonable margin of error, what the figures will be.
The 2019/20 projections include a reduction in gate receipts, a reduction in commercial and merchandising income. They also include an adjustment for operating costs. They do not include, for this year, any reduction in broadcasting revenue as a result of the recovery of some costs by the broadcasters.
For these projections, they do include the £30 million naming rights option payment by USM. This will be treated as income for accounting purposes. Despite that, I am forecasting a loss of around £65 million for the year ending 30 June 2020.
That produces an aggregate loss (before deductions) of £185 million over the last three years, getting close to double the permitted losses of £105 million. It is against that backdrop that I have consistently questioned our ability to buy in this transfer market, despite the footballing need to do so.
Having rounded up previous years’ figures, the figures are shown below:
|Profit & Loss £’000s||
|Other operating expenses||
|Profit on player sales||
|Profit before interest & tax||
|Profit before tax||
* Figures rounded **Projected figures
So the issues are as follows; cash flow arising out of the repeated costs being greater than income and secondly, the regulatory position. The former is potentially a solvency issue, the latter a regulatory issue.
The losses of recent years, since 2016, have been funded by (i) shareholder (Moshiri) contributions £350 million (ii) Increase in debt (estimated £25 -50 million) (iii) player sales (player trading profits of £200 million plus) and (iv) possible changes in creditor terms.
It is impossible to put a precise figure on our current cash flow without knowledge of the above, but it is certain that our cash flow continues to be negative and without further contributions from one of the above, solvency becomes a real issue. This also has to be contextualised with the future earnings arising out of a second wave or post Covid world. The economic damage is already being felt in terms of cancelled sponsorship contracts and (most worryingly) rights holders.
Financial year 2020/21
This financial year (2020/21) will see some significant changes to the previous year. Firstly, matchday income will be significantly less. Fortunately for Everton we are not as reliant on matchday clubs as the top six. Nevertheless, on the basis of 25% capacity across the season, match day revenues will be no more than £3.5 million (£10.4 million 2020, £14.2 million 2019). Our commercial revenues will be hit by the non recurrence of the £30 million option payment by USM and the much reduced physical attendance at grounds. Finally, as with all clubs, we will start repaying our share of the £330 million rebate to broadcasters. I estimate that to be £8 million in this year.
As a result, we will see revenues fall by an estimated £49 million compared with financial year 2019/20.
The biggest cash costs are staff wages. Everton have already made a start in reducing this year’s wage bill by a projected £15.3 million following the sale or release of Schneiderlin, Stekelenburg, Dowell, Niasse, Garbutt, Martina, Baines and several junior players.
Assuming planning permission is granted for the stadium and funding is achieved the current costs associated with the stadium development will effectively disappear from the football club’s P&L, effectively reducing costs (on a year by year basis) by £7 million.Additionally, previous costs would be capitalised benefitting the P&L (£18 million approx)
Elsewhere, the club may be able to make marginal efficiency gains in operating costs but I am not expecting anything significant.
So in the absence of further player sales, be it “the deadwood” or perhaps a trophy sale before the end of June 2021, before any incoming transfer activity & assuming planning permission is granted, the club’s P&L would deteriorate by a further £8 million taking losses for the year to an estimated £74 million.
The aggregate loss for the three years would be an estimated £250 million.
The importance of player sales this summer or before June 2021 cannot be overemphasised.
So, in the knowledge of the above, how do we improve our squad, and pay for it?
So let’s assume we complete Allan, Rodriguez (loan) and Doucoure.
Using Paul Joyce’s estimate of £25 million, it is likely we pay in instalments, possibly £10 million followed by two further payments of £7.5 million.
From an accounting point of view, I am going to assume he signs a 4 year contract worth £5 million a year. His annual cost to the P&L account is therefore £7.5 million a year (£3.3 million in wages plus £4.2 million in amortisation to June 2021)
Rodriguez realistically (and that’s a stretch!) can only come to Everton on loan – at least initially. We will pay a significant loan fee and an element of his salary. For example 60% would be €120,000 a week – £110,000. A loan fee of £5 million plus the wage contributions would see Rodriguez costing the P&L £8.6 million.
The Doucoure deal may be a combination of cash and players. Using a player as part of the deal is beneficial in that it saves cash, might reduce the amortisation cost and reduces wage costs. All of which would be beneficial, but Doucoure coming to Everton still increases our overall cost base.
Assuming we could acquire him for £25 million (significantly less than Watford’s apparent valuation) and a £80,000 a week salary on a 4 year contract would see him cost the P&L £6.9 million this year (£2.7 million in wages, £4.2 million in amortisation to June 2021)
Thus the total cost of acquiring Allan, Rodriguez and Doucoure to the P&L would for the remainder of this financial year be in the order of £23 million.
In terms of cash flow the impact would be close on £31 million (assuming we made 40% initial payments on Allan and Doucoure).
So, where does this cash come from?
It is a remarkable roll of the Ancellotti weighted dice if these three deals come off. The club is already operating at significant losses as I have pointed out on many occasions, losses which have been funded by Moshiri, debt, a creative commercial deal and player sales. This against a backdrop of a possible new stadium and now a global pandemic.
Increased debt seems very unlikely in the light of what funders of Bramley Moore would require before agreeing to fund the stadium.
Increased financial commitment from Moshiri – possible, indeed probable, but remarkable in the context of what he has contributed previously and for what he is about to contribute towards the stadium.
Aside from the players we really need to keep, it’s a hugely difficult market. This is what we have on offer and the current costs associated with employing each player
|£ millions||Wages||Amortisation||Annual cost to P&L||Book value (1.7.20)|
The sale of Sigurdsson, Bernard, Bolasie, and Ramirez would balance the books in terms of the incoming trio of Allen, Rodriguez and Doucoure. It would not improve our position financially, but clearly improve the squad and make the team far more competitive. A top 7 finish would improve our Premier League payments by £9 million.
More than that it would make tens of thousands of Evertonians much happier!
To conclude, we are stretching the financial envelope to the furthest it can go. We can fund these purchases if we can sell players this window. In the absence of sales we rely further on Moshiri and travel deeper into a financial dark hole. In that case the only alternative is sales of the likes of Richarlison and Digne in June 2021.
It is an extraordinary display of financial commitment or risk by Moshiri depending upon where you sit re financial responsibility. Me, whilst I want the players in, am entirely uncomfortable with our financial position.
Make no mistake, there is huge pressure on the club, on Moshiri, the board and Brands to find the financial solutions.