For a more general view on the Everton 2021/22 accounts please refer to part I, here

“We need to be competitive and we need to win. We have a window to establish ourselves and we will do everything we can. Now we need to look at sustainability to be amongst the elite. It takes time, but we are committed.”

Farhad Moshiri, January 2017, annual general meeting of shareholders*

Farhad Moshiri’s financial commitment to Everton has been staggering, driven by circumstances he could never have realistically foresaw in 2016. The scale of his funding arises from three main contributory factors, one very much within his control and two (apart from timing of the stadium development) beyond his control. The three factors are the exceptionally poor performance on and off the pitch, Covid-19, and the macro-economic and specific impact of the illegal invasion of Ukraine by Russia.

Each have contributed in their own way to the position Everton finds itself in, and the resultant financial shoring provided by Moshiri.

Moshiri’s investment year by year

£750 million and counting. £750 million spent on funding manager recruitment and subsequent firing, player recruitment, funding losses in six of the seven years and yes, financing the design, preparation and partial construction of the new stadium.

However even at £750 million the task or project as it was referred to in the early years is far from complete. We have a squad in which the most marketable (and most talented) players have been sold, a squad that needs considerable re-investment in the coming summer – if circumstances would permit such – they won’t. We are reliant on third party debt and the continued support of a non prime lender, and finally the completion of stadium financing – possibly another £300 million?

Our current financial condition

Before selling assets (players), before considering the stadium costs, we continue to lose cash from operations. Whilst the gap between revenues and operational costs (mainly wages) is narrowing, it is still likely this financial year (2022/23) to be cashflow negative.

To stem the negative cash flow, we either have to increase revenues or reduce costs further. Better commercial performance would obviously help but more realistically an improvement in our final position in the Premier League would benefit the finances. Dropping from 10th to 16th in 2021/22 reduced payments from the Premier League by £13.5 million. I’ll cover the potential impact of relegation later.

There have been cost savings in our total wage bill, a reduction of £20.7 million (11.3%) predominantly through the release of high earners such as Rodriguez and Bernard. Somewhat bafflingly in a period were costs must be controlled, management and administration numbers increased from 101 to 116, and marketing and media numbers increased from 53 to 78. With much of our operations outsourced, we do appear to have large staffing numbers.

The Everton business model, as with most clubs, relies on a significant contribution from player trading. Understandably Covid had an impact and that is reflected in the submissions to the accounts and no doubt, the Premier League. However in the absence of suitable replacements or the promotion of developing talent from the academy, the loss of players such as Richarlison and others in previous years puts increasing pressure on what most would recognise as a diminishing squad. Player sales contributed £67 million in profits to offset against losses elsewhere in the business and that pattern will be repeated in 2022/23 with the sales of Anthony Gordon and Moise Kean. It’s a fine strategy if the talent within the squad is not impacted, however poor recruitment decisions or more significantly, a lack of replacing player, like a goal scorer for example, remains a highly risky strategy, if for example it concludes with relegation. As mentioned earlier, lower league positions impact current revenues but also reduce the commercial and sponsorship opportunities. Everton have enjoyed “the best of the rest” premium on most commercial contracts for many years. As our competitive position on the pitch declines, it follows that any premium attained previously must erode also.

External Debt

Everton currently have two sources of external debt.

Firstly, a Covid related facility from Metro Bank, initially £30 million but now being paid down. In 2021/22 the loan balance fell by £3.75 million to £26.25 million. One assumes that this trend will continue.

Secondly, is the facility provided by Rights and Media Funding, a private lender, ultimately owned and financed through offshore companies. Everton have a £150 million, five year facility with this company and from the accounts it looks as if it was heavily utilised. I estimate at the time of the accounts in excess of £135 million was outstanding. Everton pay market rates of interest on this loan and it is not inconceivable with base rights having risen (and looking at competing providers like Michael Dell’s company) Everton will be paying an interest rate of around 10% on this facility.

I will cover the possible impact of relegation on this facility later in the piece.

The accounts notes mention the possibility of further lending facilities being agreed post the year end, but as yet there is no information to suggest further facilities have been secured.

The stadium

When the stadium project was first discussed, Moshiri’s plan appeared to be to find a significant debt partner in the early building phase, use the resources of the (to be) naming rights partner, USM, and finally to underwrite any remaining costs from his own resources. Obviously, those plans failed to materialise. Finding a traditional bank or indeed investors through a private placement (as per Tottenham Hotspur) has proved to be elusive. Three factors have been at play in my opinion – the underlying performance of the business and the quality of the board/management, Covid and the deteriorating economic conditions globally including the invasion of Ukraine and a more difficult and costly lending environment as globally interests rose to counter inflationary forces. Indeed, global inflation will have played a significant part in the overall cost of the project, even with fixed price elements (as mentioned in the accounts).

As a result Farhad Moshiri has shouldered the costs of the stadium to date. The accounts show £207 million of costs as at 30 June 2022, but potential investors believe his contribution to stadium costs currently stands in excess of £400 million.

Given Moshiri’s admission that total costs will be in the order of £760 million, that suggests £300 to £350 million is still sought. Media reports in recent months and an acknowledgement of a heads of terms being signed suggest a funding partner is getting closer. Talk of a direct equity investment though is wide of the mark. It is likely that the investor(s) will provide what is known as junior debt (junior in that it ranks below other creditors) and in addition to an agreed rate of interest will have warrants attached. The warrants would allow the investor to acquire shares at an agreed time in the future and under agreed conditions. The investor would also be provided board seats (two has been suggested) and would have control over various reserved matters (i.e. effective financial control). It is unlikely this investor will provide all of the remaining funding, additional borrowings or further investors would be required. It would however allow the continued funding of the stadium. Not withstanding going concern issues (below) the investment is not dependent upon Premier League survival.

The “going concern” issue

In annual reports and accounts directors and auditors have a duty to confirm (or not) that in their opinion the company will meet its financial obligations when they become due. and that the company has the resources (and future resources) to function without the threat of liquidation for the foreseeable future. This is usually regarded as at least the next 12 months from the signing of accounts.

In the 2021/22 accounts both the directors, auditors draw attention to the detailed notes (note 1(C), page 22) within the accounts:

Directors Report:

Auditors Report:

Notes 1. (C) contain the following

The directors were satisfied to confirm the club could meet its financial obligations for the following 12 months on the basis of existing banking facilities (described above) and a further injection from Farhad Moshiri of £70 million to fund the new stadium development and operational cashflow.

The directors have produced detailed cash flow forecasts based on 2 scenarios (i) maintaining our Premier League status at the end of 2022/23 season and (ii) “a severe but plausible downside” of relegation to the EFL Championship.

In the event of (ii) the club would review its cost base, trading strategy and defer discretionary spending to offset reductions in revenue.

From the notes relegation has two significant impacts (i) reduction in revenues (ii) the requirement for a “material repayment” of debt (one assumes to Rights & Media Funding)

Dropping into the Championship would have a huge impact on Everton’s revenues. In 2021/22 Everton received £115.1 million in broadcasting revenues. In the first year of relegation a club receives 50% of the equal shared revenues – based on 2021/22 figures that would be a parachute payment of £40.75 million – a reduction in income of £74.35 million. In addition, it must be assumed that commercial income and perhaps gate receipts might fall also.

Secondly, the requirement to repay existing debt facilities – the accounts do not specify the exact amount but the covenant requires a material repayment.

The notes confirm the club is in advanced negotiations for further long term funding and for stadium financing. However neither are currently legally binding.

In addition, Farhad Moshiri, has provided “a letter of support” confirming his intention to continue funding the club for the following 12 months from the date of the accounts (27 February 2023). However it must be stressed that this does not represent a legally binding commitment and thus is not guaranteed.

The notes conclude as follows:

So what does all this mean?

Simply, if relegated, there is a significant doubt that we could continue as a going concern. In practice that means the club if not supported by the major shareholder could enter administration. There are however alternatives – it is not a given.

The club has assets – it has players. Inevitably there would be a fire sale of players, both to generate cash but also to reduce costs. It is unlikely we could enter the Championship with most of the existing squad being retained.

Moshiri could sell the club at a discounted price to new owners who would re-capitalise the business, pay off debt and continue financing the stadium construction.

Alternatively, the club could sell the stadium to an investor or property developer. The stadium has an asset value, it might be worth at least as much as it has cost to date – perhaps more than £400 million. It might be worth even more on the basis of what it would cost to construct the stadium at today’s prices. The new stadium owner would complete the construction and have Everton as its tenant.

I stress each of the above are options in the event of relegation, the calling in of debt and Moshiri’s inability or unwillingness to provide further funding – administration whilst highlighted in the annual report and accounts is not a given – there would be options, albeit deeply unpalatable options. One hopes we never get to this position as the prospects for the club would be bleak, on and off the pitch.

As I concluded in Part I, the stark reality is that the club does face an existential threat. Absurdly as an ever present in the Premier League, as a club in receipt of £750 million of shareholder funding since 2016, as a club that has to sell its best players to have a hope of remaining compliant, we find ourselves in this position.

I cannot consider in any other business that the board and executive could survive having brought such peril to a business. Moshiri’s greatest failing to date has been his inability or unwillingness to bring in or retain professional business people to run his club, oversee and invest his largess wisely. He must act immediately or sell the business to those that can do so. If he doesn’t the decision could be taken away from him in administration.

That would be at even greater cost to not only himself but to everyone associated with this venerable organisation. He has a duty (as do the directors) to protect our beloved club from the peril it faces. Changing nothing – directors, executives or ownership will see the warnings within the accounts materialise. The threat can be no clearer, nor can the solution.

Part III examines the accounts and funding of Everton Stadium Development Company