With five games of the season to go, at the time of writing, Everton sit in 19th place and for the first time since 1951 face the prospect of relegation from the top division of English Football. In that year relegation was sealed on the final day with a 6-0 loss to Sheffield Wednesday amid claims we “sleep walked” into our fate.
With the advent of the Premier League and the resulting financial chasm, relegation today is a hugely significant affair, especially for a club ever-present in the Premier League. A club with a cost base more akin to the Champions League than Championship.
As is commonly known, revenues fall significantly when dropping into the Championship. The obvious loss of broadcast revenues is compounded by a reduction in sponsorship, commercial and usually matchday revenues.
To mitigate against that loss of revenue, relegated clubs receive parachute payments from the Premier League, more of which below.
Tougher regulatory environment – lower loss limits compounded by lower revenues
The regulatory environment in the Championship is much stricter and more austere than the Premier League. As against the £105 million loss limit over three years under Premier League profitability and sustainability rules, a club dropping from the Premier League to the Championship would have an aggregate 3 year upper loss limit of £83 million at the end of the first season, £61 million in the second, and £39 million in the third. Therefore a club losing money heavily in the Premier League in previous years prior to relegation, would have to see an enormous improvement in its finances despite the increasing reductions in revenue over time. As you will see from calculations further down the article, parachute payments reduce after the first year.
The EFL (English Football League) are also much less forgiving to clubs in breach or potential breach of financial regulations.
Therefore the big question finance directors and boards of relegated clubs must ask themselves is can the reduction in revenue be offset by a corresponding reduction in costs.
The evidence suggests not. In the table below, we look at each relegated club back to 2012/13. The table looks at (i) the reduction in revenues between the last year in the Premier League and the first year in the Championship, and (ii) the reduction in wage costs between the two years.
Given wage costs are the biggest element of a club’s cost base, in order to reduce losses or build a buffer for future losses, you might expect wage costs to fall by a larger amount than the reduction in revenues. The reality is that that rarely happens. The reductions in revenues are (with only a couple of exceptions) greater than the reduction in wage costs.
The table shows the reduction in turnover in cash terms and as a percentage of the previous turnover. It also shows the reduction in wages. If the wages fall by less than the fall in turnover then assuming other costs remain constant losses must increase (even before taking into account reductions in commercial and matchday incomes)
There is obviously the impact of Covid which has not been accounted for in 2020 and 2021 but the evidence is clear over a decade – clubs do not reduce their wage costs by the corresponding reduction in income.
Why? Some of it will be contractual – players deciding to stay at a relegated club in the absence of a relegation clause or a better offer from another club. Jack Rodwell at Sunderland in the most exceptional example of this. But it’s also because relegated clubs will take a gamble – they will take advantage of their income advantage over the incumbents in the hope of bouncing back into the Premier League the following season. 23 out of 82 relegated clubs have managed to bounce straight back.
The need to get out of the Championship is very apparent – given parachute payments decrease after year 1 and as we can see costs don’t fall as quickly.
What happens to Everton should we get relegated?
The latest available figures shows Everton’s Premier League broadcasting revenues for 2021/22 as follows:
- Equal share UK revenues – £31.81 million
- Facility fees (based on appearances) – £19.41 million
- Merit fees UK (based on league position) – £8.44 million
- Equal share international revenues – £48.9 million
- Merit fees international (based on league position) – £1.84 million
- Total £110.39 million
Let’s assume 2022/23 are similar.
Parachute payments are calculated as a percentage of the equal share payments made to Premier League clubs. In the first year of relegation 55%, the second year 45% and the third year 20%.
Thus for Everton:
First year after relegation, parachute payment of £44.39 million – a reduction of £66 million
Second year of relegation, parachute payment of £36.32 million – a reduction of £74.07 million
Third year of relegation, parachute payment of £16.14 million – a reduction of £94.25 million
What does that mean for Everton?
We made a loss of £44.7m on turnover of £181 million in 2021/22 and that includes £67.7 million of trading profits. Wages cost £162 million.
This current year (2022/23) will see our turnover fall to around £165 million, but our wage costs have dropped by an estimated £10 million to £152 million. It is conceivable with the sale of Anthony Gordon and Moise Kean we will be approaching break even for the year. If we were to be relegated though, we would by a considerable margin have the highest turnover and highest wage bill of any previously relegated club.
With a number of contracts terminating in June 2023, there will be a natural fall in the wage costs. Player disposals (an inevitable consequence) would see wages fall further, some players may have relegation clauses, but I don’t believe this will be a significant cost saver.
Would Everton’s wage bill fall from around £150 million to below £85 million to cover the loss in broadcast revenue? Based on the evidence of previously relegated clubs, it seems unlikely. What is more, such a reduction would surely make an already threadbare squad even less competitive – unless there was a huge turn around in recruitment policy and outcomes.
We would lose money heavily in the Championship, even with very significant and unprecedented cost savings through player disposals. Bear in mind the losses of 2021/22 and possible near breakeven of 2022/23 are only achieved through player trading and with full Premier League broadcast payments.
Two issues arise from from this – (i) a regulatory concern given the EFL regulations and their insistence on compliance, but (ii) and much more importantly, the ability of the club to meet its future obligations.
Let’s leave (i) and deal with (ii).
In the 2021/22 accounts the directors and auditors draw attention to the detailed notes (note 1(C), page 22 within the accounts:
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 (see above) (ii) the requirement for a “material repayment” of debt (one assumes to Rights & Media Funding)
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. And 2 months on from the signing of the accounts there is no greater certainty regarding that funding.
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.
As I concluded in Part I of my analysis of the accounts, 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.
Moshiri 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 both on and off the pitch.
We need to find the points in our last five games to stave off this stark threat. But that in itself is not enough, we need a new board, a new Chair and given the huge peril Moshiri has driven us to – a new owner
Categories: Everton finances