Imagine being offered a business that has the following characteristics:
- Is particularly sensitive to the timing of the transaction
- Has lost money six out of the last seven years
- Is cashflow negative
- Has an impaired & depreciating inventory
- Significant future capex requirement
- Subject to regulation in terms of investment and future P&L performance
- Moderate balance sheet
- Has a net debt position
So what is the appeal of such a business?
- It’s in a sector in which the very best businesses have grown significantly in value in recent years
- It’s in a sector that some investors believe to be cheap relative to other businesses in similar sectors
- Relatively few businesses of this nature come to market
- It holds a licence that guarantees the majority of its current revenue year after year subject to performance criteria
- A significant improvement in product performance opens another licensing opportunity that generates substantially greater revenue
- A number of revenue streams are totally undeveloped
- It has a large and loyal customer base, relatively under exploited in revenue terms
- The Capex requirement funds a fixed asset that will increase revenue streams and add shareholder value.
- The business could have brand appeal in the future from a different class of investor
- The R&D capabilities of the business could be massively improved
- The business has under-performed for many years and represents a turn-around opportunity
How does a prospective buyer go about agreeing a value for such a business, and then assuming the business is acquired how do you turn it around/redevelop it and make it competitive at the top end of its sector?
Firstly, valuation from Moshiri’s perspective
A business is worth what the buyer is prepared to spend, and what the seller is prepared to accept. Every buyer and every seller will have different views on what they are buying/selling, different reasons and motivations (dependent on their own circumstances) for buying and selling and often one or the other will have a specific timing in mind (although from a negotiation perspective it is important usually never to volunteer your timing objectives). Occasionally business owners enter a forced sale position (although again, they would do everything to disguise that fact).
Every consultant, agent or banker involved in the sale or purchase of a business will have a valuation model based on factors such as balance sheet, turnover, profitability, competitive peer valuation models, future capex requirement etc. Football is no different in the sense that the models exist.
However, I take the view that almost every football club represents such a unique cocktail of valuation, prospective owner and prospective seller factors, both good and bad, that most of the models used traditionally are not hugely valuable.
It makes no sense to me at least, that the price Newcastle United were sold for, or the price Chelsea have been sold for, bears any significant relevance to the value of Everton. Similarly the part ownership disposals of clubs as diverse as Manchester City, Liverpool and West Ham United have little comparative value because of the unique circumstances of each club and their prospective buyers and sellers.
From Moshiri’s perspective, the sale price of Everton will be a balance of what he has already invested, what he thinks he is giving up in terms of future value then discounted by the knowledge that in order to achieve that value he has a weighty amount of further investment to make to achieve that. I suspect he is also taking a view on what Newcastle were sold for, and West Ham part sold for – but as I say I don’t hold much store by those comparative valuations.
On a fundamental basis, in my view, the equity has next to zero value. Loss making, negative cash flow, depreciating inventory (players), huge capex (stadium), large research & development costs (academy) and a lack of business intelligence and track record within the business. Moshiri and his team will obviously hold a contrary opinion.
He will argue that the current position is a reflection of a post-Covid, still early stage investment not yet reaping the rewards of that investment in performance and revenue terms.
Additionally, it has some intangible assets. As a seller Moshiri could argue Premier League membership is an annual licence, renewed on the back of satisfactory performance (i.e. not getting relegated). Additionally there is the prospect of other licences to generate higher revenues for out-performance (qualification for UEFA tournaments).
Players are intangible assets and often cited as being fundamental to valuations. Yes, perhaps in relation to performance, a good squad gets you European football which adds to the value of the club, but it is also expensive and carries significant costs. The player values are like inventory, tie up capital, they depreciate over time, and if sold have to be replaced, often at greater expense. Realistically, can Moshiri argue Everton’s inventory is worth a premium over acquisition, market or replacement value?
The academy is the research and development arm of the business, producing products (players) to be sold or to enter our own inventory, but also in developing a particular playing style. A very successful academy can create a product characteristic that has future value (Ajax for example). Can Moshiri point to the current performance of academy (despite the recent personnel changes) and claim there is value in it, either through style or actual product?
Moshiri will have a view that Everton’s brand and global awareness has a value which adds to the sale price. The counter argument is to look at commercial performance, particularly sponsorship levels. If Moshiri’s assertion is right then that would be reflected in sponsorship levels paid by the club’s current partners. However, there is little evidence of that value reflected in current commercial deals.
Moshiri will argue that the progress with Bramley-Moore dock, the planning permission, the construction contract with Lang O’Rourke, the construction to date, the steady progression to the scheduled completion date, has value to the new owner and therefore has to be reflected in price.
A company with a strong, committed, invaluable management team with a superior track record can add to a company’s valuation. Can Moshiri say that about his current board and executive? Indeed can the prospective buyer demand a discount given past performance and the future replacement costs?
Finally evidence of good governance, strong systems and good people, good relationships with regulators and a reputation for best practices adds to the sale price. The contrary is equally true. An absence of good governance deters some investors or reduces the price offered.
Proper, thorough due diligence tells the buyer what the seller doesn’t tell you. Depending upon the condition of the business and the performance of the previous owners, due diligence can either confirm what is in good order or can highlight potential problems leading to further price negotiations.
Thoughts behind the offer (from the buyer’s perspective)
So the buyer will have the funds to buy and invest (one hopes). He or she will be attracted to the sector, the geography and the particular circumstances of Everton Football Club. He or she will have a clear idea of what they want to spend in acquiring the club, but equally importantly, what further capital or perhaps in the case of introducing connected sponsor partners what future revenues are required to be injected to meet their investment programme.
As football is a regulated business, and it is thought Everton have specific arrangements regarding their profitability and sustainability position, the buyer will want a full understanding of the implications in terms of the restrictions it places on their future spending plans regarding the squad. They will require full assurance from the Premier League as to future conditions. This may have a significant effect on price.
From a footballing perspective the potential buyers will want an understanding of the football management team, their ambitions and their costing for what they require for their future plans. Ideally the potential owners should employ valuation specialists alongside the existing management opinion to create a portfolio analysis projecting future values, future wage obligations and future capex requirements to complete their squad. This is a crucial exercise and again underlines the specific nature of each individual club valuation.
More than anything, the stadium or new commercial arrangements, it is the knowledge of what is required to invest in the team, the ability to do that (from a regulatory point of view) and the likelihood of achieving the ultimate objective, trophies and regular Champions League that will drive and frame expectations for revenue growth. This is a key element in valuing a football club.
The buyer will have a detailed analysis of the board and executive team, knowing who, if any, they wish to keep, and the replacement costs for those leaving the business. Disruption costs need also to be considered in this exercise.
Specifically for Everton, the future capex requirement on the new stadium. What has been agreed in terms of cost? what has been spent already? and what is the potential for cost over-runs, general contingency financing and also delays to the project? In addition there must be a firm idea of the revenue model for the new stadium including naming rights, sponsor packages, premium seating revenues and general admission revenues. Added into that the additional revenue creating opportunities arising from a state of the art modern stadium. Perhaps capacity increases may also be considered both in terms of cost and future revenues – based on planning approval, sites ability to increase capacity and their confidence in filling a bigger stadium.
The funding model for future investment in the stadium has an impact on the price the buyer wishes to pay. An acquisition part or predominantly funded by debt carries greater cost than self funding (although all capital carries a cost obviously). Why does it impact the acquisition cost? Because it influences the net cash the stadium will generate in the years ahead. It may also affect the future marketability of the club through onerous “make good” or early redemption charges.
The buyer will also have a view as to the capacity for the club to grow commercially? How much of the club’s potential has already been exploited, how much more growth is there, and what is the cost of acquiring the growth? This also has an impact on the price paid.
So what are Everton worth?
Firstly, sorry for all the words, I hope you stuck with it, but it’s important to realise why football club purchases are each unique and that should be reflected in what the seller expects and what the buyer is prepared to pay.
Figures such as £500 million for the club and £500 million for the stadium have been thrown about. I think they’re nonsense. I started with all the difficulties the club faces, I commented that on a fundamental basis one could argue the equity is worth nothing. Yet the current owner will argue that he’s spent near £800 million on share purchases and loans, that that level of investment counts for something. He’ll argue that all the costs already incurred on Bramley Moore – planning, pre-construction, filling the dock, now at the stage of steelwork being erected has to be reflected in the club’s value.
Yet for all of that, the new owner has major investment required in players, in replacing the board and executive, in funding on-going losses for perhaps a further two years.
How much of the construction costs have yet to be found? It can’t be the full £500 million as all works to date have been paid for.
A £1 billion investment in Everton’s current condition doesn’t suggest much upside in terms of future valuations. How long, even with a brand new stadium for Everton to be worth in excess of £1 billion to give the new investors a return on their investment? What performance levels would the football team have to reach and how likely is that? Investment at that level £1 billion is a huge risk with limited medium term upside and plenty of downside potential.
A huge commitment of £1 billion leaves less (logically) to invest in the squad – every pound that goes to existing shareholders is effectively a pound that doesn’t go to the squad.
Moshiri, given his position, given the future capital needs of the club and current financial performance (let alone footballing performance) has to be realistic on price. By all means get the commitment to funding the stadium and future squad development, but the price of the equity has to reflect the club’s (and his) failings.
There’s always a payment for potential in situations where fundamentals suggest little or no value. There’s also an element of saving face, logically in business that doesn’t matter, but the reality is that it does to an extent.
Timing is important too, for the club’s sake, for its ability to get on in this window, a takeover has to happen sooner rather than later. Completing after or close to the window closing won’t help the club much at the beginning of this next window. That perhaps works in Moshiri’s favour in terms of price negotiation.
So deep breath, if the equity was sold for £250 million, if the remaining £300 to £400 million of funding for the stadium was guaranteed by the new owner, if there’s a commitment to provide sponsor revenue to fund player acquisitions, if Moshiri retained up to 20% of the equity then both buyer and seller would likely feel aggrieved, but then that’s usually a sign of a fair deal for all parties.