Financial accounts before Christmas, numerous games over the holiday period, the FA Cup 3rd round and the Annual General Meeting of shareholders of Everton Football Club Company limited. December and January represent a busy time for Evertonians.
The significance of the general meeting and the very fact we still have 1400 or so minority shareholders should not be lost on anyone associated with the club or indeed anyone who has a passing interest or more, in corporate governance generally or indeed more specifically in football.
At a time when the game continues to move away from its roots and football clubs become part of wealthy shareholder investment portfolios, trophy assets of the vain and soft power vehicles for oligarchs and States to exploit, the role of the general meeting and of minority shareholders should become more treasured and more valuable.
The general meeting should not just be a nod to a distant past of deference to those charged with running our club, but a recognition that (i) Everton shareholders are an increasingly rare and privileged group within football and (ii) regardless of the fact that Moshiri has complete control by virtue of his 77.27% shareholding, the role of minority shareholder accountability and scrutiny of the majority shareholder, board and executive still exists within the club. The fact it is not used, valued or recognised to the extent it should is a great shame. The position shareholders find themselves in today may not exist for much longer. Whilst available, and with the club not performing in line with reasonable (and the majority shareholder’s previously expressed) expectations, it should be utilised to the greatest extent. Why? Because accountability and scrutiny generally lead to better outcomes. Better outcomes make the delivery of success more likely.
So what are the issues the major shareholder, board and executive should be addressing at this meeting?
Finances
The general meeting is a business meeting and as such the finances of the club ought be explained. As I have explained in some detail here and here, Everton’s finances are poor, supported by the combination of external debt and significant financial support from Farhad Moshiri.
Whilst an element of our current losses can be attributed to the continued reductions in matchday, broadcasting and commercial revenues, plus the pre-planning costs associated with Bramley-Moore, the fact is that the business even in the absence of Covid would currently be loss making. It was pointed out by Denise Barrett-Baxendale at the last general meeting that this might be expected at the early stage of an investment cycle. However, next month sees the fifth anniversary of Moshiri’s involvement in the club. The question needs to be asked, five years in, what progress towards sustainability has been made?
In the four complete financial years since Moshiri’s initial acquisition of 49.9% (February 2016) a summary of our financial performance shows:
| £ millions | 2016/17 | 2017/18 | 2018/19 | 2019/20 | Aggregate |
| Broadcast | 130.50 | 130.00 | 132.70 | 98.00 | 491.20 |
| Matchday | 14.10 | 16.30 | 14.20 | 11.90 | 56.50 |
| Sponsorship/Ad/Merch | 15.40 | 20.70 | 29.10 | 63.70 | 128.90 |
| Other commercial | 11.40 | 22.20 | 11.70 | 12.30 | 57.60 |
| Total | 171.40 | 189.20 | 187.70 | 185.90 | 734.20 |
| Staff costs | -104.70 | -145.50 | -160.00 | -164.80 | -575.00 |
| Other operating costs | -39.20 | -36.80 | -43.20 | -33.10 | -152.30 |
| Depreciation | -2.50 | -4.00 | -6.50 | -6.90 | -19.90 |
| Total | -146.40 | -186.30 | -209.70 | -204.80 | -747.20 |
| BM Stadium costs | 0.00 | -11.40 | -7.20 | -19.90 | -38.50 |
| Management change costs | 0.00 | -14.40 | 0.00 | -4.40 | -18.80 |
| Pension value revision | 0.00 | 0.00 | -0.50 | 0.00 | -0.50 |
| Operating Loss before player trading | 25.00 | -22.90 | -29.70 | -43.20 | -70.80 |
| Amortisation | -37.30 | -66.90 | -95.10 | -99.20 | -298.50 |
| Impairment | 0.00 | -8.20 | -2.50 | -26.30 | -37.00 |
| Management change costs | -6.60 | -6.60 | |||
| Profit on player trading | 51.90 | 87.80 | 20.30 | 40.50 | 200.50 |
| Loss before interest & tax | 39.60 | -10.20 | -107.00 | -134.80 | -212.40 |
| Interest | |||||
| Received | 3.09 | 2.93 | 0.00 | 6.02 | |
| Payable | -5.94 | -7.79 | 0.00 | -13.73 | |
| Net | -9.00 | -2.84 | -4.87 | -5.10 | -21.81 |
| Taxation | -0.10 | -0.03 | 0.03 | 0.00 | -0.10 |
| Total Profit/(loss) | 30.50 | -13.07 | -111.84 | -139.90 | -234.31 |
- Normal operating expenses continue to outstrip income. In the absence of European football or asset (player) sales that will continue for the foreseeable future. Other than the significant contributions made by USM (including the one off £30 million naming rights option premium), commercial revenue growth remains moribund. What targets exist for commercial income growth and what improvements to the commercial team are planned for 2021?
- International fan growth and the ability to monetarise this segment of the fan base remains a weakness relative to our peers. What are the targets for 2021 and beyond, plus what is the strategy and development plans to meet them?
- The introduction of Hummel as kit and apparel provider has been well received by fans. However, it is still extremely difficult to buy in-store outside of the city of Liverpool, nationally and internationally plus the Fanatics controlled e-commerce offering still suffers from a reduced range and inadequate availability of stock. What plans are there to improve and develop this?
Debt providers
- We rightly promoted our banking relationship with ICBC when first announced. Rights and Media Funding was seen as a short term measure whilst alternative mainstream banking facilities were sought elsewhere. Apart from the CBIL facility with Metro Bank what progress has been made?
Compliance with financial fair play plus profit and sustainability rules
- Whilst the ongoing Covid-19 pandemic creates uncertainty as to how the rules will be applied and the near future levels of scrutiny from UEFA and the Premier League, to what extent do they impede the operations of the club and perhaps most importantly the acquisition of new players?
- Assuming qualification for UEFA licensed competition next year, to what degree is their concern as to our potential non-compliance with financial fair play arising from past and projected financial results?
The stadium
- To what degree has the Covid situation and the longer term financial implications of the economic damage caused by the pandemic been factored into the business plan surrounding the stadium?
- To what degree have the assumptions on commercial revenues and the likely take up by businesses/fans with higher disposable income, of premium seating offerings been changed? Similarly what assessment of future affordability for regular fans has been made?
- What has been the changes in attitude by lenders in terms of their perceptions of risk and their willingness to lend?
- What is the latest on projected costs, what is the projected breakdown of debt, shareholder funding and commercial partner/naming rights partner funding?
- The projected timetable twelve months ago set a target opening date for the stadium of the beginning of the 2023/24 season. Can the club update their projected opening date?
Board composition
- The Everton board consists of four paid executives, Bill Kenwright (Chair), Denise Barrett-Baxendale (CEO), Sasha Ryazantsev (Finance/commerce) and Marcel Brands (Director of Football). Given all four are executives where is the scrutiny and oversight of the executive on behalf of shareholders?
- Why are there not independent directors in a non-executive capacity to provide (i) scrutiny and oversight, (ii) external expertise and opinion and (iii) a greater degree of corporate governance?
The possible share placement
Alongside the publication of the annual report and accounts in late December, the club announced a possible placement of shares (detailed here) in favour of Farhad Moshiri’ shareholding vehicle Blue Heaven Holdings, in return for additional investment and the conversion of some of the existing shareholder loans to equity. Arising from that are the following questions:
- What will be the value of the placement? (assumed up to £250 million in total)
- How much new funding is provided and when? (Assumed £100 million, £50 million received in November 2020 and an additional £50 million to be received when?)
- How much existing shareholder debt will be converted to equity? When, at what price and will the new shares issued be identical to the existing ordinary shares held by shareholders?
- Assuming that the placement takes Blue Heaven Holdings above the 90% threshold, what guarantees are there that existing minority shareholders will not be subject to a “squeeze out” ie the requirement to sell their shares to the majority owner?
Questions to the Director of Football
As a director of the company, Marcel Brands is subject to the same scrutiny as his fellow directors. I am sure all shareholders (and fans) are keen to know more in relation to:
- His relationship with Carlo Ancelotti and specifically their combined approach to first team recruitment
- His management of the academy, its operations, budgets, personnel, strategy and specifically its ability to produce players suitable for and desired by Carlo Ancelotti
- The areas of improvement required in preparing players for careers with Everton or other high performance clubs
- The financial targets set by the board in terms of loaning, developing and selling talent not required by/ appropriate for the first team squad
- The development of a single footballing philosophy throughout the academy consistent with the future needs of the club
Governance
I’m conscious that the questions posed above require answers from the board members and the majority shareholder (not only in terms of the share placement but also the long term strategy of the business and club). That in itself is a little unusual but given the dependence the company has on Moshiri’s funding and the influence he has on strategy and decision making at board and executive level it is appropriate to ask questions of both parties.
In an ideal world, the Chairman could fulfil the role (one of many different roles) of being the conduit between the majority shareholder and the board/executive. Reporting to the board the wishes of the majority shareholder, reporting to the majority shareholder the opinions and performance of the board and being accountable to the wider shareholder base at the general meeting. It is a huge weakness of the current structure that such a process is not possible.
Equally, the fact that (as mentioned earlier) there is no independent scrutiny and oversight at board level is a weakness. A board composed of executives with no external scrutiny or oversight is nothing more than a management committee. Important in the operational matters of the club and company, but that’s not the true purpose of a board. All shareholders should (in my opinion) be demanding independent representation at board level. In this context independent meaning an individual having no previous formal association with the club, having no shareholding nor any other financial interest.
Four years ago
At his first AGM in January 2017, Farhad Moshiri said the following, “We have a position but we do not have all the time in the world. We need to establish ourselves and we have a window to do it. Bill and previous managers kept the club close to the elite for many years but now we need to look at a sustainable base to be among the elite. It takes time but we are committed, that’s why we are here.”
No one can doubt his financial commitment. However, he didn’t commit to what the time frame is and some with blue tinted glasses may argue we have made progress in that objective. I don’t believe we have. I’d argue the gap between us and the elite (despite Moshiri’s millions – £400 million with another £50 million to come before the stadium is financed) has continued to grow – certainly financially, and are we any closer on the pitch?
We need answers to the questions as to why we’ve not met our (Moshiri’s) objectives. We need scrutiny of the last years but we need oversight for the future. Above all else we need people who can deliver. That requires change, change of personnel, change of approach, change of mindset at board and executive level, change of leadership.
The only person who can deliver that change is the man who has funded the activities of the last five years. Whilst the remaining shareholders have the chance to ask the questions, the opportunity to ask and demand answers should not be given up. It remains our club, Everton will always be the fans’ club – the majority shareholder is a custodian of our emotional ownership but he, the Chairman, the CEO, the board members and other executives must be held to account, respectfully and professionally, of course.