Once the headlines are out of the way and the carefully prepared media statements are published, a more balanced view of the accounts is called for (in my opinion) plus within the details confirmation of additional funding from Moshiri since June 2021.
So here’s a delve into the figures, drawing upon previous year’s numbers and external sources to try to contextualise the performance of the club, the contributions of Moshiri and our financial institutions, plus an analysis of how the club may have reached the “Covid impact” numbers to satisfy the Premier League’s profitability & sustainability rules.
|Turnover in £’000s||2015/16||2016/17||2017/18||2018/19||2019/20||2020/21|
- Direct comparison is difficult given the booking of Project Restart revenues from the 2019/20 season into the 2020/21 financial year and of course, the absence of crowds for most of 2020/21. However it is reasonable to say revenue has flatlined since 2017/18.
- An empty Goodison (highest attendance 6,608 v Wolverhampton Wanderers) impacted match day revenues falling from £11.9 million to £200,000. This is totally attributed to Covid regulations and the club bears no responsibility for this.
- Broadcast revenue. As a result of the final games of the 2019/20 season falling into the 2020/21 season broadcast revenues were boosted by £23.5 million. Remove that from the figures and broadcast revenue would have increased by £1.4 million.
- Interestingly, domestic based broadcast revenue rose by £1.6m due to a 10th place finish versus 12th in the previous year. However, the changes to how international broadcast revenues are calculated and distributed saw international broadcast revenue fall by £1.1 million despite improving league position by 2 places.
- Commercial income. The biggest factor was the impact of the one off naming rights deal in 2019/20. The removal of £30 million means that for a meaningful comparison commercial and sponsorship income rose by £600,000 a 1.3% increase year on year. New commercial partnerships with Cazoo & Hummel particularly, plus the absence of a sleeve sponsor shows income growth of 8.3% over the last three years. Remove the increase in USM sponsorship and income fell by 7.8% albeit in a year impacted by Covid.
Whilst not included in the accounts, the suspension of the USM relationship (for that I think we can assume ending) has a big impact for the financial year 2022/23. Equally the ending of the Cazoo partnership at the end of the season, and the continued absence of a sleeve sponsor means that at the time of writing Everton are without three of their six top commercial revenue streams for the 2022/23 season (the six being training ground sponsor, main shirt sponsor, shirt sleeve sponsor, apparrel manufacturer Hummel, retail partner Fanatics and our outsourced catering partner Sodexo).
In a hugely challenging macro-environment combined with recent poor playing performance, the commercial team have a significant task ahead to even match the previous revenue streams. The club has resisted returning to main sponsorship from betting companies and the current craze for Crypto related sponsorship would seem at odds with the club’s culture and previous announcements by the CEO Denise Barrett-Baxendale.
|Expenses – £’000||2015/16||2016/17||2017/18||2018/19||2019/20||2020/21|
|Other op exp||30,428||39,184||36,800||43,200||33,100||25,300|
- Wages, the biggest expense component for any football club. They alongside amortisation are the key drivers in the huge losses Everton have been accustomed to make in recent years. Unlike amortisation they are a cash item, meaning not only do they impact profitability but cash flow as well.
- The key additions of Allan, Doucoure, Godfrey and specifically James on the playing side plus Carlo Ancelotti as manager drove wages up by 10.9% from 2019/20 levels and a staggering 117 % from the wage costs inherited by Moshiri.
- Other operating expenses fell by 24% predominantly due the reduced cost of holding games without spectators present plus other operational efficiencies. As an example, the number of youth academy employees fell from 84 to 70.
- A wage to turnover ratio of 94% is completely unsustainable. There are three solutions. Increase commercial income, improve on pitch performance for greater performance rewards and finally cull the squad, remove the unproductive higher paid players and replace either with academy prospects or fundamentally change our recruitment policy. This would require ending the Moshiri/big agent relationships & their recruiting and putting complete responsibility for recruitment in the hands of the director of football and his recruitment team and processes. It would also require a fundamental change to the productivity of the academy. By productivity, increasing the number of players capable of making the transition from academy to first team. However this is a relatively slow process, even after the necessary changes to the academy are made, as we have seen for example with Gordon, it takes time for the prospect to make an impression at first team level.
From the perspective of this financial year (2021/22) there are significant changes in the playing personnel and management.
Those having left the club include Ancelotti and Benitez plus their respective teams; Rodriguez, Bernard, Walcott, Kean, King, Pennington, Bolasie and Besic permanently.
Incoming includes Benitez, Lampard, Gray, Townsend, Rondon, Mykolenko, Patterson, Alli and Begovic on permanent deals plus Lonergan, El Ghazi and Van de Beek until the end of the season.
This financial year will reflect the leaving of Ancelotti and Benitez and the considerable cost savings of the players having left. I estimate a reduction in wage costs of at least £16 million for 2021/22. However even that leaves us hugely out of budget especially in the context of reduced broadcast and merit income from a significantly lower league position.
Impairment of player registrations and amortisation
- Everton’s amortisation costs fell by 18% from £99.2 million to £81.2 million. This was actually a surprise to me, I had anticipated a small rise. In the previous year we had sold/moved on Gueye, Vlasic, Lookman and Schneiderlin which would have reduced our amortisation costs. At the same time we acquired Iwobi, Kean, Gomes and Gbamin.
- How was the fall in amortisation costs achieved? Well, if we look at the impairment figures (this is a reduction in the book value of players when their book value exceeds their real market value. The aggressive writing down of nearly £40 million of book value has significantly reduced the amortisation costs. Initially the net effect is at best neutral, but by booking the losses in a year where the board felt could be justified on the grounds of Covid rather than poor recruitment (for example) seems a smart move. Not only is the immediate loss justified by Covid, it provides for a lower cost base going forwards
- One of the impacts of perhaps writing down a player to zero or having a player who is unlikely to contribute meaningfully in the future or offer any future financial value (not being unduly harsh but Bolasie is probably one of the examples, Besic perhaps another) is that the club has to make provision for onerous contracts. This is where the cost of meeting your future obligations (wages) exceed the economic benefit provided by the player. In 2019/20 this figure was £4.4 million. In 2020/21 this grew to £7.7 million.
Profit & Loss numbers
These are the numbers that gain the headlines, and indeed the numbers that currently relate to the financial regulations preferred by the Premier League, profitability and sustainability.
|Profit & Loss £’000s||2015/16||2016/17||2017/18||2018/19||2019/20||2020/21|
Aggregate losses of £379 million including the year in which Moshiri first acquired his 49.9% stake (February 2016). However a more reasonable analysis is the full 5 years to 30 June 2021. How does that compare across the Premier League?
|Profit/Loss £ millions||2016/17||2017/18||2018/19||2019/20||2020/21||Total|
|West Ham United||43.0||18.3||-27.3||-64.7||22.1||-8.6|
This data is taken from each club’s audited accounts. Not all clubs have yet published 2020/21 figures. What is apparent, Aston Villa aside, is the magnitude of Everton’s losses relative to the rest of our competitors. It amplifies the constraints on revenue and the lack of value achieved in recruitment, resulting in sustained losses unlike any of our peers.
The crystalised losses as stated in the accounts are as follows. The club claim that lost revenue and additional costs total £82.1 million for the last two completed financial years. I will do a complete analysis versus other clubs when all accounts are published.
The club’s public announcements re the scale of the impact of Covid are covered below.
Farhad Moshiri’s funding commitments – loan balances & issue of new shares
As with any business the losses have to be covered by existing resources, the sale of assets, increase in debt or new capital (in the form of equity or shareholder loans).
In the 5 year period to 30 June 2021, Everton have generated £221 million of player trading profits, we have increased our external debt by approximately £75 million and received £450 million from BlueSky Capital, an Isle of Man Company controlled by Farhad Moshiri.
£200 million of the loans had been converted to shares (67.667 shares at £3,000 each) upto 30 June 2021. Since this date a further £100 million of shareholder loans were converted (33,333 shares at £3,000) . It should be stressed that this was not new cash into the club.
In addition to the above Farhad Moshiri has committed another £245 million in 2021/22 – this financial year. Of this commitment, he has already provided £100 million in new shareholder loans. If the whole commitment is utilised it will take his funding of Everton to £595 million since February 2016. As a result he stands to be the third largest benefactor in English football
|£ millions||Amount invested||Outstanding S/H Loan||Value of new shares|
It is clear from the accounts and the absence of new charges against the club or the stadium development company that the stadium to date is being funded from existing resources (the bank balance was £70 million at 31 June 2021), existing debt providers (if required) subject to debt limits (the Rights and Media funding is a £100 million 5 year facility) and a further £100 million shareholder loan from Farhad Moshiri.
The accounts acknowledge the cost of the first phase of the build programme – the enabling works contract cost £77.8 million.
The two additional elements of the stadium financing are the naming rights partner and raising long term debt funding from the US private placement market. The previously assumed naming rights partner, USM, is no longer viable nor one suspects, desirable. Therefore the club will be seeking a new partner. The completion of long term debt from the private placement market (the market used by Spurs for example) seems no closer than at any time in the last few years. The club’s inability to address its financial performance, Covid, and even the threat of relegation may all be contributory factors. The delay in financing may impact the cost of borrowing. Corporate debt yields in the US have risen from their lows of a year ago – financing a £350 million loan today would cost approximately £5 million more in annual interest payments than a deal struck twelve months ago.
Profitability and Sustainability
A significant part of the club’s briefing of the accounts was the “headroom” created by taking covid factors into account. The accounts calculate the cystalised impact of Covid in terms of lost income and higher expenses, totalling the figure to £82.1 million. However the club publically have stated the total impact (calculated by a third party) is £170 million and could possibly be as high as £220 million. It is this calculation that the club have used to justify their position with the Premier League. The Premier League have always acknowledged their willingness to allow clubs to adjust their profit and loss accounts in the light of the Covid impact.
How did Everton arrive at the figure of £170 million? The club have not published the precise calculations but with a few assumptions and a little (calculated) guesswork it’s possible to get close.
It is important to recognise that the losses are not real, well at least not all of them – they’re a reflection of where the club was at June 2021 as against where it thought it should be had Covid not occured.
Firstly the “real” losses: The accounts show Lost Revenue and Additional costs related to Covid as £67.3 million for 2020 and £14.8 million for 2021. These are crystalised losses, i.e. they occurred, are readily identifiable and (as far as accounts can be) the truth. Total: £82.1 million.
Then we have the write down of player values (the club will argue directly due to Covid) £26.3 million in 2020 and £15.3 million in 2021 – total £41.6 million. Onerous contracts (again the club will argue directly due to Covid) £4.4 million in 2020 and £7.2 million in 2021 – total £11.6 million.
Un-crystalised losses are the difference between where the club was and thought it should be. What constitutes an un-crystalised loss? Lack of profit through lack of trading, lack of profit through supressed prices (although that argument can be countered by making incoming purchases cheaper).
As a result of some players not being sold (the club will argue because of Covid related market conditions), Everton incur extra costs – wages and amortisation, as well as the absence of expected profit.
For 2020/21 players that might have been sold but were not include Bolaise, Tosun, Kenny and Keane. In addition it could be argued that Ramirez and Schneiderlin went very cheaply. Amortisation costs for those not sold are approximately £19 million. Wage costs for those not sold (but lent out – say attribute 50% of wages) are approximately £8 million
Adding up all those figures gets you to £162.3 million. Add in what the club would say is a reasonable loss of player trading profits and you get to the £170 million figure quite easily. Throw in some other transfers out that didn’t happen and you can get to £220 million.
However they are calculated, and the club’s version may be different from mine, the Premier League seems to have accepted them as a justification for the accumulated loss position greatly in excess of £105 million.
The scale of our losses over the five complete years under Moshiri are staggering especially when compared to other Premier League teams. Equally, his financial commitment is staggering.
However the issue of how the club is run, the level of commercial expertise that exists, the crazily unstructured recruitment processes both in terms of managers and players, the inability of the Chairman and board to maintain control (let alone move the club forward) are deeply worrying.
At what point will Moshiri recognise his limitations as a football club owner? At what point will he recognise that the Chairman, the board and the executive team are not adequately skilled, experienced or driven to create a successful football club. His recent comments on the back of fan campaigns suggest he is still some way from recognising what is patently obvious.
The manner in which the club is being run threatens the club further financially. It has already created huge financial and reputational damage in my opinion. On the football side we may for the first time in 70 years lose our top league status. If one considers the figures above to be a bloodbath, even a year in the Championship would make them look like a tea party. Not only that but the club would lose its better players, would have a less attractive academy going forwards and ultimately put the completion of the stadium and the regeneration of the North of Liverpool at significant risk.
The stakes are much greater than the balance of Farhad Moshiri’s bank account. The very being of the club is at stake. We have deteriorated so sharply in recent years under Moshiri’s ownership and the direction of the Chair, board and executive.
There’s no point in being in denial any longer. The very existence of the club is at risk unless significant changes are made to the personnel, the governance and the control of the club. A continuation of existing practices and ill-discipline may prove fatal to the patient, at best will leave the patient in a hugely sub-optimal position whilst it’s peers, on the back of more relaxed financial regulation, new capital inflows, far superior leadership and greater ambition stretch their competitive advantages beyond breaking point, leaving us adrift, a former great club with no means of returning to its former glories.