On Saturday 30 November 2024, shareholders of Everton Football Club Company Limited received the following correspondence from Colin Chong, Chief Executive Officer of Everton. It concerned the future treatment of the shareholder loans (totalling £450 million) from Bluesky Capital to Everton. Bluesky Capital is the Isle of Man Company, majority owned by Farhad Moshiri, that has provided the working capital to cover the excessive losses and the stadium costs incurred during the Moshiri years. It is separate to the external debt provided by Rights and Media Funding, 777/A-Cap and the Friedkin Group.

The letter is as follows

Dear Shareholder,

I hope this communication finds you well.

As a valued shareholder of Everton Football Club, I am writing to provide you with an update on the recent amendment to Premier League rules regarding Associated Party Transactions, and what this means for the Club and its shareholders moving forward.

It is also important to explain, within the context of the detail I am sharing with you today, what the rule amendment means for the proposed purchase of Blue Heaven Holdings’ (BHH) shares by The Friedkin Group (TFG).

All parties are working to secure the necessary regulatory approvals to complete the transaction, and that is progressing well.

It has not been appropriate to provide information on the takeover whilst the regulatory approval process continues, but I am happy to share with you that TFG has demonstrated a high level of professionalism and a clear, focused approach throughout this process. This has ensured a smooth preparation for the transition of ownership for everyone involved at the Club, and provides a clear indication as to the future trajectory of the Club, which I’m sure, as a shareholder, you will welcome.

In accordance with the Club’s Articles of Association, a letter will be sent to all shareholders via post ahead of the completion of the sale asking you to vote on all company resolutions required to advance the transaction to completion. The majority shareholder will be voting in favour of each of the resolutions presented.

One of the resolutions shareholders will be asked to vote on will ensure the Club will not be adversely affected by the new rules approved by the Premier League shareholders last Friday in respect of Associated Party Transactions (APT). The changes have been put in place following an Arbitration Panel’s ruling earlier this year, which made clear shareholder loans needed to be brought within the scope of APT within the Premier League’s rules.

For clarity, the impact of the rule amendments means that, going forward, all loans any shareholder wishes to provide a club will be subject to a Fair Market Valuation (FMV) assessment, and (regardless of the terms of the loan) market interest rate and costs will be applied to the loan facility for the purposes of a club’s PSR calculation – or any future financial sustainability calculation mechanic.

The rule changes also mean any club with a current shareholder loan balance (as we have), must take steps to ensure such loans are capitalised on or before 11 January 2025, to avoid these loans potentially having a negative impact on a club’s PSR calculation for the accounting period 2024/25.

In addition to the resolutions around change of control you will be asked to approve, this will be the basis of one of the resolutions included in the formal communication you will receive through the post in the coming weeks.

As a result of these changes, shareholder loans will no longer provide a PSR neutral route for the injection of funds into a club, leaving equity investment as the only means through which additional funding can be provided without negatively impacting investment in the playing squad. The APT rule amendment requires a capitalisation of shareholder loans which, in turn, will result in the creation of new shares in the Club.

I can assure you the Club, our current majority shareholder and TFG have put in place a structure for the takeover agreement that ensures these rules do not negatively impact the Club’s PSR position and will enable TFG to continue to invest in the Club and in the team in the years ahead.

I am aware there is a great deal of anticipation about the vision and plans of our prospective new owners. It is important to explain that, out of respect for the ongoing process, it would not be appropriate for TFG representatives to communicate directly with shareholders at this time.

Accordingly, the letter from the Club confirming the resolutions in advance of completion will be your next formal communication on this matter.

I felt it was important to keep you informed, and your understanding is appreciated.

Kind Regards,

Colin Chong

As the letter states it relates to two issues, (i) the change of treatment of the existing loans provided by Bluesky Capital, the Isle of Man company controlled by Farhad Moshiri and (ii) the upcoming takeover of Everton by the Friedkin Group

In order not to fall foul of the future costs of the new Associated Party Transactions (APT) rules brought in recently by the Premier League, Everton have to convert the loans into equity prior to 11 January 2025.

This involves the creation of new shares.

In order to do that the processes as laid out in the Everton Articles of Association have to be followed.

The share capital of Everton Football Club Company Limited can be increased by an ordinary resolution of shareholders – ie a resolution that requires a simple majority to approve. That, of course, is guaranteed as Moshiri currently owns 94.1% of Everton’s 135,000 shares in issue. and the future ownership by the Friedkin Group.

A written resolution to that effect requires 14 days notice. Prior approval of more than 95% of shareholders can waive that notice period (paragraph 10.2 of the Articles of Association). In theory, a combination of Moshiri’s holdings and that of the estate of Bill Kenwright would be sufficient to see the notice period waived. However, the assumption must be that 14 days notice will be given.

However, we must also consider the approval of the Friedkin Group takeover. The working assumption is (and one assumes Premier League Approval must be granted prior to the resolution) that the first resolution shareholders will be asked to accept is the purchase of Blue Heaven Holdings shares by the Friedkin Group. Whether that resolution will include the shares of all shareholders, ie the full 135,000 shares is not known. Legally the Friedkin Group will have the right to acquire all minority holdings with the acquisition of Blue Heaven Holdings’ shares.

The price of the acquisition of the equity by the Friedkins (and previous potential purchasers) has always fascinated me. The recent auction which concluded on 29th November 2024 saw 72 shares traded at £3,400 each. It is thought that Moshiri will receive no more than £25 million initially for the sale of his 127,031 shares – the two different valuations do not compute.

There’s also the issue of the conversion of the Bluesky Holdings loans. At what price are they converted, therefore how many new shares are issued, and when would the conversion take place?

Again, there are no answers to this question yet. Logically, the current shareholder loans would be converted into equity through a highly dilutive issue of equity immediately acquired by the Friedkin Group at minimal consideration, after the sale of the 127,031 shares to the Friedkin Group by Blue Heaven Holdings. This would also resolve without disclosure, the fact that the loans are provided by a separate entity, one that is controlled by Moshiri, not wholly owned.

Additionally, in order not to fall foul of the Associated Party Transaction rules, the Friedkin Group will either have to confirm that their loan to Everton is at market rates, switch the loan to another lender (at market rates) or convert the loan into equity held by the Friedkin Group.

Conclusion

From the above we can establish that the Friedkin takeover is close, but even post Premier League approval shareholder approvals will take a minimum of 14 days (unless waived by more than 95% 0f shareholders) and that immediately after the takeover Everton’s balance sheet will be considerably stronger with the conversion of the £450 million Bluesky loans (referred to as the Moshiri/shareholder loans) and the likely conversion of the existing Friedkin loan of circa £200 million.

The treatment of the other outstanding loans, ie Rights and Media Funding and the 777/A-Cap loans are to be determined. However the natural conclusion is that under the new Friedkin ownership, a much stronger balance sheet, and a completed stadium a much more competitive, senior, long term loan secured against the commercial and matchday revenues of the Everton stadium will be forthcoming.

Assuming the Friedkins resolve our on-field issues, including new management and a greater prospect of Premier League security, our prospects as a business look brighter than for many a long year.

The Moshiri nightmare is nearly over.