Everton

Cash flow, Moshiri’s capital injections & the potential placement of new shares

Jack Welch, the former CEO and Chairman of General Electric (GE), had a favourite saying. “If I had to run a company on three measures, they would be customer satisfaction, employee satisfaction and cash flow. Cash flow is the pulse, the vital sign of the company.”

If cash flow is so important, then what is it?

Cash flow is the net amount of cash being transferred into and out of a business. At the most fundamental level, the value of a company to shareholders is based on its ability to generate positive cash flows. For football fans it is important as it signifies the club’s ability to buy and sell players, build a squad and pay competitive wages over the long term. The list of football clubs (and fans) that suffered due to failing cash flow is long and extensive – it is what destroys clubs – Leeds, Portsmouth, Wigan, Bolton, Bury, Newport County to name but a few.

Cash flow is calculated by looking at 3 principal areas, operating cash flow, from investing activities and finally from financing activities.

The most successful clubs (in normal times) generate cash from their normal operations, i.e. they generate more cash from income (matchday, broadcasting, commercial and sponsorship) than they spend on expenses (player wages and operating costs).

Clubs also generate cash from investing activities. For football clubs this means the purchase and disposal of player registrations. For many clubs, player trading is a fundamental part of their business and can (especially in inflationary times) generate significant cash flows for further investment in talent. The reverse is also true, in deflationary times or perhaps through poor player acquisitions, player trading can reduce cash flow. For example, a raft of poor purchases that become difficult to sell plus the need to replace those purchases to be competitive on the field has a massive impact on cash flow. Everton, in particular, are a case in point with a series of poor player acquisitions either sold at a cash loss or in the case of not being able to sell having considerable wage costs to incur on non productive assets.  As Evertonians are well aware, this is compounded by the need to acquire replacements.

If operations or investing activities do not generate positive cash flow what can clubs do? In the first instance if they have built up cash reserves in the past (Arsenal are the prime example of a club with significant cash reserves) those reserves can be used as a buffer between costs and income. Most clubs are not in that position and have to look to alternatives.

In the first instance debt is used. Even in pre-Covid times many clubs used future income as a means of generating cash through borrowing from banks (in the case of the largest clubs) and other specialist lenders (in the case of smaller clubs or those with poor credit profiles). Even in the income rich Premier League, many clubs have used future season ticket revenues and/or future broadcasting awards as security against short term debt usually repayable at the end of each season/financial year, only to be re-instated immediately after. This is both expensive in terms of interest payments and can also be inefficient in terms of the fees paid to arrange and administer these arrangements.

Finally there is shareholder funding. This is where the owner or owners provide funding for the club either through interest bearing debt with a defined term, non interest bearing and non term defined debt and finally through the issue of more shares to some shareholders (a placement) or all shareholders or indeed new shareholders (an issue).

Whilst debt and shareholding funding is very normal business practice, in football if the club is not profitable or is losing money outside of fairly strict limits, then both UEFA and the Premier League, then this form of funding is not sufficient alone to pass the financial regulatory tests (in normal times).

Before looking specifically at Everton, it should be noted that Covid-19 above all else impacts cash flow with the almost complete absence of matchday income, the potential for a reduction in sponsorship and broadcasting revenues plus limited opportunities for player trading profits.

Everton:

Now, looking at Everton and specifically the 4 complete financial years that Moshiri has been the major, then majority shareholder:

Cash Flow Analysis – Moshiri 4 complete years £’000s 30-Jun-20 30-Jun-19 31-May-18 31-May-17 Total
Net cash flows from operating activities
Operating cash flows before movement in working capital  (42,781)  (23,211)    (8,633)      27,453 (47,172)
Net cash generated from/(used in) op’s  11,059 (9,825) (6,821) 22,716        17,129
Cash flows from investing activities
Proceeds from disposal player registrations 85,751 67,098 52,756 30,823 236,248
Proceeds from sale of fixed assets 40 7 47
Purchase of player registrations (128,395) (134,796) (155,828) (70,554) (489,573)
Purchase of fixed assets (7,638) (1,926) (7,920) (5,737) (33,221)
Interest received 42 16 4 62
Shareholder loans treated as equity 49,999 149,250 44,775 104,475 348,499
Net cash flows used in investing activities (241) 69,666 (66,381) 59,018 62,062
Cash flows from financing activities
Interest paid (3,093) (1,718) (2,127) (11,807) (18,745)
Repayment of borrowings (18,750) (75,500) (57,520) (151,770)
Repayments finance lease (20) (34) (54)
New loans 40,000 35,331 75,188 150,519
Net cash flows from financing activities 18,157 (41,887) 73,041 (69,361) (20,050)
Cash at bank at beginning of period 27,429 9,475 9,635 (2,737)
Net increase/(decrease) 28,975 17,954 (160) 12,372
Cash at bank at end of period 56,404 27,429 9,475 9,635

Let’s look at the 3 main contributors (or not) to cash flow.

Operating activities

Firstly, from normal operations over the 4 years ( June 2016 – end June 2020) normal operations say a negative cashflow of £47.172 million, much of which is incurred in 2019/20.

However, as companies try to do, by increasing creditors (a person or company owed money to) over and above any increase in debtors (a person or company that owes us money) it is possible to turn cash flow positive. So for example, in 2019/20 Everton generated net cash of £11 million by increasing creditors (in particular HMRC which increased from £16 million in 2018/19 to £41 million in 2019/20 – a payment which is due before 30June 2021)

Investing activities

As mentioned earlier the buying and selling of players has a huge impact on cash flow. As is well documented, in the last four years (and in 2020/21) Everton have spent significant sums on players seeking a squad with sufficient playing quality to finish high in the Premier League and reap the financial rewards of European qualification. Sadly, we know this strategy hasn’t been successful to date. As a result in cash terms, player acquisitions to June 2020 have cost the club a staggering £489 million (plus another £70 plus million from last summer) whilst we have raised £236 million from player sales. Add in the purchase of fixed assets and over 4 years (before Moshiri’s loans) a negative cashflow of £286 million from investing opportunities. Now not all this has been wasted as clearly we have acquired a number of players worth more than we acquired them for, but this is an analysis of cash spent and received from investing activities.

To fund such acquisitions, Moshiri to June 2020 has provided a total of £348.5 million in non interest bearing and non term specific loans. Because of the lack of repayment terms they are viewed as equity, but as things stand they remain as loans. Without these loans we could not have been so active in the transfer market  (nor engaged in other investments Finch Farm, Goodison and the preparation for Bramley-Moore)

Financing activities

To assist cash flow over and beyond operating and investing activities, Everton have used short term debt. The net cash flow of loans from ICBC (now wholly repaid), Santander, Metro bank and Rights and Media Funding is negative over the period by an amount which is only slightly greater than the interest cost. Again though without continued and continuing use of such facilities, Everton could not operate without higher cash flow contributions from investor or operation contributions. They form a critical part of our day to day financing.

Moshiri dependent

As a result, to a degree compounded by Covid-19, Everton could not have operated in the manner that they have without the financial commitment of the majority shareholder.

The bottom line of the above table shows cash in the bank increasing by some £46 million over the 4 year period but to a large extent that is an illusion – it’s funded by the shareholder loans of £348.5 million and an increase in the net creditor/debtor position of the company.

The question for Moshiri is (i) how long is he prepared to fund losses (ii) how long will the regulators allow such losses and (iii) how does he restructure the debt position of the club to provide reassurance to potential stadium lenders and also make his own position more secure with the club.

His commitment to the playing side and the acquisition of Ancelotti suggests he still sees the potential of European football to help re-balance the finances in the years to come (which will also give relief for point (ii) in the future).

The remaining question to be answered is point (iii).

Potential placement of new shares

As has been seen above, the club has survived by cash injections from player sales, increased debt, an increase in creditors and critically the continued financial support of Farhad Moshiri.

At the time of publication of the most recent accounts the club released information about a proposed placement of up to £250 million worth of new shares. The placement would be supported in its entirety by Farhad Moshiri through his company Blue Heaven Holdings. It is worth therefore looking at how exactly this is achieved and the impact it has on existing shareholders.

What a company can and cannot do and the protections afforded to shareholders are covered by statute and the provisions of a company’s articles of association. In the case of Everton both the Companies Act 1985 and the Companies Act 2006 apply, as do the most recent articles of association (amended in 2008).

Firstly, the right of the company (The Everton Football Club Company Limited) to issue more shares. (An issue of shares is when a company creates new shares which it sells to shareholders as a means of raising cash) The right to issue more shares in laid out in Section 8 of the articles.

Using the above, an ordinary resolution of a general meeting (requiring greater than 50% approval) is sufficient to increase the share capital. However, this would allow all shareholders to participate in the offer of new shares through existing pre-emption rights (the rights of shareholders to acquire new shares in line with their existing holding).

The plan though is to make a placement of shares to which only Moshiri will participate. How is that achieved? It can only be achieved through a special resolution (requiring greater than 75% approval) denying all other shareholders their pre-emption rights. At the time the general meeting is called, a written statement provided by the directors must be included with the resolution. The written statement supporting the special resolution must include the following:

  • The reasons for making the recommendation
  • The amount to be paid to the company in respect of the allotment
  • The directors’ justification of that amount.

With Blue Heaven Holdings in possession of 77.23% of the clubs shares, Moshiri does not need to call upon additional shareholder support to pass the required special resolution. Thus he can (after following due process) with the support of his directors be the sole recipient of new shares.

From the briefings by the club the share placement would be up to £250 million. Of that £250 million, £100 million would be fresh investment – including the £50 million committed in November 2020, a further £50 million injection and a capitalisation of existing shareholder debt up to the value of £150 million.

The capitalisation of some of the existing shareholder loans strengthens the balance sheet (necessary for the external stadium financing) and strengthens Moshiri’s position with the club.

It is likely that the new shares be offered at £3,000 per share. If the proposed maximum of £250 million of shares were issued this would have the following affect:

Existing shareholding % Shares issued at £3,000 New shareholding %
Blue Heaven Holdings 27,031 77.23 83,333 110,364 93.27
W Kenwright 1,750 5.00 0 1,750 1.48
Others 6,219 17.77 0 6,219 5.26
Total 35,000 100.00 83,333 118,333 100.00

What would be the impact of Moshiri passing through the 90% shareholding threshold?

Firstly, minority shareholders lose the (possibly mute) authority to ensure a poll is undertaken to pass resolutions at general meetings. At above 90%, Moshiri can override that requirement. Secondly, and perhaps more importantly, if Moshiri was to make an offer for the whole company then the minority shareholders have no option but to sell their shares. It is important to stress two points:

  • By virtue of the placement (as described above) he is under no obligation to acquire the minority shareholdings

and

  • it should be said that Moshiri has always stated it was his intention to allow minority shareholders to retain their shareholding. Obviously if Moshiri was to sell the club at some point in the future, there is no guarantee that that undertaking would be honoured by a new owner.

Going forwards:

Further information will be provided by the club in due course. What is clear from all the above is the extent to which Moshiri has committed himself to the club financially. What is not clear is whether the money has been spent wisely or whether the board and the executive have the necessary skills to turn around the operating and investing performance of the club.

In the meantime Moshiri confirms a commitment of £350 million already received, a further £50 million committed in November and an additional £50 million at a yet to be determined date.

All this and we haven’t even spoken about what he will have to commit to Bramley-Moore!

5 replies »

  1. A good read as usual Paul, always find it fascinating how different owners approach the running of their clubs and how the ambition to grow revenues is (to some degree) driving the spend on new players. This of course can work well if there is a clear strategy in place (Witness those across the park from you in FSG 2.0 and Man City once they got the Barcelona band together, both initially started badly of course).

    There are of course many examples of where this has failed, Moshiri’s Everton and NSWE’s Aston Villa are still project’s that have yet to reach a stage where we can make a judgement. Though the spending path is on a very similar trajectory – Villa of course were quick to address the debt burden (by converting to equity) and all the new (vast) investment in the last year has been via share issues.

    The commercial operation at Leeds United is one the rest of the 14 will soon be envious of. They are well on target to possibly be the 7th best commercial revenue generator in the League this season (overtaking Everton) – their 1st in the top flight in 16 years. They reportedly were on target to earn close to £40m last season in the Championship before the pandemic, having earned £27m+ the season before. This season has seen them with new deals in all new major commercial channels (with significant multiple uplifts in Kit and Shirt sponsorship) and many additional new sponsors. They also have the benefit of starting from a lower cost base to help their cash flows but there wages are likely to see them mid table this season. They are a club that have taken on debt though, and have repeatedly been forced to sell players to meet financial fair play – fortunately they have an academy that brings at least 2 players a season into the first team squad.

    The alternative approach comes from a club like mine (Burnley), who ensure that they run an tight operational cash flow and seek to generate an operational profit before player sales where possible – this allows them to invest in infrastructure when significant player sales occur (such as Michael Keane – thank you btw). We have less than £10m in outstanding transfer debt (at least 30% of which is conditional) and no commercial/director debt. Interestingly given the way finances are in the game we have no football creditors (all outstanding non-conditional payments were due in the summer) – we were also insistent over the summer window that we wanted at least 70% of any outbound sale as cash upfront – unsurprisingly there were no takers. I suspect that last season (which we will account for as a 13 month period at Companies House) will see a minimal operational loss and that this season will be on target for the same, our own cash reserves have allowed us to get through the pandemic without borrowing, furlough, wage cuts or job losses – The prospective takeover could see all this turn on it’s head rapidly, though there is hope that new owners could see us grow our commercial effectiveness (even that had been growing substantially year on year for 3 years pre pandemic seeing it more than double).

    You make an interesting point re price of new shares to be paid by Moshiri, it is not often one is able to buy additional shares in a club at a substantially less price than at initial purchase, particularly if the club is still in the same League, Though it could be argued that this is reflected in the clubs debt position, profitability and underlying operational performance they may still be overvalued even before you incorporate the TV/Sponsor rebates (to be paid back over multiple seasons and non yet announced for this seasons games), lost matchday income and the prospect of static/falling rights values in the next cycle.

    The convention (irrespective of @KieranMaguire using the Markham method for his academic valuations – which you discussed here https://theesk.org/2017/10/26/the-valuing-of-football-clubs/) is that Premier League clubs outside the big 6 actually sell between 1.3 and 2.2 times revenue, with number of consecutive years and relative safety in the league, profitability and debt determining where the multiple value lies. Hence Leeds being towards the bottom end of the scale in their recent £240m valuation based on a proposed purchase of an additional 15% of shares by the San Francisco 49ers. FWIW the proposed transaction for Burnley is also at the bottom end of the scale – even after 5 seasons in the PL and no debt and plenty of nous – yet many think it is top whack including Maguire who valued us at £350m in April using the Markham Method (https://priceoffootball.com/2728-2/) substantially more than he valued Everton.

  2. A good read as usual Paul, always find it fascinating how different owners approach the running of their clubs and how the ambition to grow revenues is (to some degree) driving the spend on new players. This of course can work well if there is a clear strategy in place (Witness those across the park from you in FSG 2.0 and Man City once they got the Barcelona band together, both initially started badly of course).

    There are of course many examples of where this has failed, Moshiri’s Everton and NSWE’s Aston Villa are still project’s that have yet to reach a stage where we can make a judgement. Though the spending path is on a very similar trajectory – Villa of course were quick to address the debt burden (by converting to equity) and all the new (vast) investment in the last year has been via share issues.

    The commercial operation at Leeds United is one the rest of the 14 will soon be envious of. They are well on target to possibly be the 7th best commercial revenue generator in the League this season (overtaking Everton) – their 1st in the top flight in 16 years. They reportedly were on target to earn close to £40m last season in the Championship before the pandemic, having earned £27m+ the season before. This season has seen them with new deals in all new major commercial channels (with significant multiple uplifts in Kit and Shirt sponsorship) and many additional new sponsors. They also have the benefit of starting from a lower cost base to help their cash flows but there wages are likely to see them mid table this season. They are a club that have taken on debt though, and have repeatedly been forced to sell players to meet financial fair play – fortunately they have an academy that brings at least 2 players a season into the first team squad.

    The alternative approach comes from a club like mine (Burnley), who ensure that they run an tight operational cash flow and seek to generate an operational profit before player sales where possible – this allows them to invest in infrastructure when significant player sales occur (such as Michael Keane – thank you btw). We have less than £10m in outstanding transfer debt (at least 30% of which is conditional) and no commercial/director debt. Interestingly given the way finances are in the game we have no football creditors (all outstanding non-conditional payments were due in the summer) – we were also insistent over the summer window that we wanted at least 70% of any outbound sale as cash upfront – unsurprisingly there were no takers. I suspect that last season (which we will account for as a 13 month period at Companies House) will see a minimal operational loss and that this season will be on target for the same, our own cash reserves have allowed us to get through the pandemic without borrowing, furlough, wage cuts or job losses – The prospective takeover could see all this turn on it’s head rapidly, though there is hope that new owners could see us grow our commercial effectiveness (even that had been growing substantially year on year for 3 years pre pandemic seeing it more than double).

    You make an interesting point re price of new shares to be paid by Moshiri, it is not often one is able to buy additional shares in a club at a substantially less price than at initial purchase, particularly if the club is still in the same League, Though it could be argued that this is reflected in the clubs debt position, profitability and underlying operational performance they may still be overvalued even before you incorporate the TV/Sponsor rebates (to be paid back over multiple seasons and non yet announced for this seasons games), lost matchday income and the prospect of static/falling rights values in the next cycle.

    The convention (irrespective of @KieranMaguire using the Markham method for his academic valuations – which you discussed here https://theesk.org/2017/10/26/the-valuing-of-football-clubs/) is that Premier League clubs outside the big 6 actually sell between 1.3 and 2.2 times revenue, with number of consecutive years and relative safety in the league, profitability and debt determining where the multiple value lies. Hence Leeds being towards the bottom end of the scale in their recent £240m valuation based on a proposed purchase of an additional 15% of shares by the San Francisco 49ers. FWIW the proposed transaction for Burnley is also at the bottom end of the scale – even after 5 seasons in the PL and no debt and plenty of nous – yet many think it is top whack including Maguire who valued us at £350m in April using the Markham Method (https://priceoffootball.com/2728-2/) substantially more than he valued Everton.\

  3. A very clear summary, Paul. Thank you. For me, this is primarily about putting the club in the best possible shape to attract debt finance to build BMD, and Moshiri has shown total commitment to the club to facilitate that. What will the valuation of the club be when the project is complete, by which time Moshiri’s investment alone in the club will be in the region of £600m? Surely the club needs to show a compelling case to lenders that it can hit revenues of £400m+ consistently for it to prove attractive to financial institutions? Gulp!

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