the esk

This article first appeared on The Blue Room on 29th March 2017.

I was asked an interesting question on Twitter in comparing the Arsenal Emirates stadium financing to the proposed financing of Bramley Moore.

It’s widely thought that the stadium financing of the Emirates has held Arsenal back since 2006, and that this is the principle cause of their relative lack of success in the last 10/11 years. Well, I don’t subscribe to that view at all. Whilst it’s true that the original terms were quite onerous (more later) and considerably more onerous than the proposed Bramley Moore stadium terms, the major reason for not competing with Arsenal’s peers lies with the Arsenal board not their financiers.

The fact is that the Arsenal board are guilty of several strategic decisions which has led to Arsenal not being as competitive in the transfer market as their financial strength and revenues would allow.

The whole period with Wenger’s tacit approval has been marked by caution and in my opinion excessive financial prudence.

Usmanov and Moshiri as owners of Red & White Holdings were both critical of the board’s original and subsequent unwillingness to put cash into Arsenal’s business, relying more on debt to fund the stadium. Now that may seem a little odd, particularly in the light of Moshiri’s strategy with everton, but more of that in a few minutes.

When the Emirates stadium was built in 2006, the cost was £390 million, £130m was provided by the club and £260m in the form of a 14 year fixed rate senior debt deal with a number of banks including RBS.  In addition further loans were provided for working capital purposes and for the property development division of Arsenal dealing with the redevelopment of Highbury.

The initial £260 million was lent in 2003, and was subsequently converted into a £260m bond issue in 2006. One of the conditions of the 2006 refinancing was that Wenger commit himself to the club until at least 2011 – a clear indication of his compliance with the financial prudence strategy of the club.

Such has been the financial prudence of the club and not only in the early years, that in the period 2007-2015, 36% of the club’s expenditure (including net spend on players) has been on debt interest and debt repayment. This is an important figure, something we will return to when looking at Everton.

Further to the above Arsenal have devised a trading strategy of generating profit principally from two sources – player trading and property development profits from the old Highbury stadium and associated properties. This has covered operational losses, and allowed Arsenal to build a significant cash pile which in net terms almost completely wipes out their remaining debt.

Player trading – a big part of Arsenal’s financial strategy:

Figures in £m

Aggressive accumulation of cash to reduce net debt position

Figures in £m

So there’s Arsenal’s financial strategy since the Emirates has been built, prudent building up cash, reducing the net debt, whilst generating considerable profits from player trading.

A deliberate strategy with the compliance (and to a large part, executed) by the manager Arsene Wenger.

So how does that compare with the proposed financial deal to deliver a brand new, iconic stadium on the banks of the Royal Blue Mersey?

Firstly it has to remembered that Everton remain relative financial tiddlers compares to Arsenal with our 2016 turnover being £121.5 million against Arsenal’s £350.6 million.

The proposed funding package for Bramley Moore Dock is an entirely different proposition to Arsenals – size of turnover being one of the considerations.

Everton have gone for a long term structured debt repayment strategy, largely covering all of the costs of the stadium,  whilst using a combination of the City Council’s Balance Sheet and a charge against all assets of the club to provide a secure low interest debt deal.

The objective is to minimise the burden of the stadium financing at a time when the club is in an expansionary phase regarding player and squad development, yet from a low but rapidly rising income base.

As mentioned, in the last accounts Everton had turnover of £121.5 million. I’ve done some estimates of the likely turnover by the season 2020/21 our likely first year in our new stadium.

In that year I’m assuming the following turnover figures:

Obviously these figures are estimates, based on Premier League participation and Europa League qualification. For non-qualification revenues would probably fall by £30 million (including sponsorship) and for Champions League last 16 qualification rise by a minimum of £20 million. Therefore the range may comfortably be expected to be £245 million to £295 million per annum 2020/21 onwards.

This turnover figure is extremely important as we can determine the affordability of the proposed Bramley Moore financing package.

Estimates have varied from £14 million to £17 million annual “rent” costs. I’m going to be slightly more cautious and say for ease of calculation £20 million.

Based on these figures, the loan “burden” on Everton should represent base case 7.3% of turnover, best case 6.8%, and worst case (assuming continued Premier League membership) 8.2%.

This needs to be compared with the percentage of turnover applied to interest and debt repayment at Arsenal 2007-15, 36%

The original question asked about how Arsenal financed their stadium and the impact it had on their player acquisition, and how that compares to Everton. Clearly the Arsenal board has had a greater impact than the stadium may necessarily have had itself, but the message for Evertonians is that the proposed Bramley Moore scheme has minimal impact on the normal finances of the club and actually allows us to significantly build revenues assisting the ongoing development of the club, a better quality squad and higher wages arising from non-broadcasting incomes.

Far from being a burden, Bramley Moore is an affordable, yet critical enabler in the development of the club, back to competing with the biggest and the best.

When you support a team or just like when you love someone, objectivity often gives way to perhaps unrealistic expectation, and in the case of Everton, unashamedly I’m as bad as most in this respect.

Against the footballing odds, every year I’m expecting us to roll up to Stamford Bridge, Old Trafford, The Etihad, The Emirates, White Hart Lane and even Anfield and do the business – show the footballing world and the media that they’ve got it all wrong. We are “the greatest team the world has ever seen” and that Leicester are not unique in upsetting the Premiership apple cart. Even after Saturday I’ll probably tweet “Everton 2-0 winners v United, Lukaku & Barkley” sometime before kick off at Old Trafford – we all do it, or most at least.

Of course, the evidence suggests otherwise, and more often than not it ends in bitter disappointment. Our record against the top 6 is poor, particularly away from home as several statistical sites have shown us in recent days.

One of the theories is a fear factor that has pervaded the corridors of Goodison for the last 20 years, since the end of Joe Royle’s tenure. I don’t subscribe to that fully as it provides hiding places for individuals – I’d prefer individual accountability as mentioned in previous articles.

The fact is we have no right to win at any of these places (i) because that’s not how professional sport works, but (ii) and more importantly the gulf in resources is just so great.

There’s been plenty written about transfer budgets and net spend – how for example it appeared that we sold to buy in the summer for example – not something I subscribe to given the number of other transfer bids we made, albeit none getting over the line.

What’s often overlooked is the cost of growing and maintaining a top squad. This is the most important single measure of understanding how much a club has spent to get to the position it occupies.

In order to arrive at the figure we need to look at two sets of figures in the accounts (i) wages and (ii) player amortisation. This gives the most accurate report of the cost of putting together and running a squad. It’s a much more meaningful representation of investment in the team than net spend, gross transfers etc etc.

Before we look at the figures, a quick explanation. Players are in accounting terms “intangible assets”. Thus the moment they’re bought their value on the club’s balance sheet starts to fall in line with the length of their outstanding contract. (This has nothing to do with the market valuation of the player). So a player bought for £20m on a 4 year contract, will see a charge (amortisation) of £5m per year against his value. By aggregating the total amortisation we can get an accurate apples v apples comparison of what a club is spending to be competitive (or not).

In terms of caveats, one possible flaw to this method is the treatment of players brought through the academy. Take Ross for example, his value in terms of the balance sheet is zero, as because we never paid anything for him in accounting terms he has no value. (Obviously his market value is very different).

So, on to the figures:

Below is the amount of money each of the top 7 have spent on wages and accounted for amortisation of their players over each of the last 6 years:

Annual wages plus player amortisation, £m

In chart form it looks like this:

So the big question is what can be done about the above? The glimmer of hope is Spurs. Whilst they’ve spent more on wages (£579 m versus £414 m over the last 6 years) the difference is not so great as for example, Manchester City with £1.2 billion.

Spurs are proving that it is possible to compete on significantly less than their competitors through two main factors I believe – their manager Pochettino and secondly, the excellence in the way that Daniel Levy runs their club.

The questions for Evertonians is can Koeman compete at a similar level to Pochettino as a manager and coach, can Walsh deliver in finding value among less known players, can the academy deliver players capable of performing at the higher end of the Premiership, and finally can the business be run on a par with Spurs? I suspect we can match them for being parsimonious, but as I’ve often stated before, outside of the main shareholder and his representative we don’t appear to have talent and ambition in equal measures.

We’re moving forward on and off the pitch there is no doubt about it, we have a great manager, an improving team with real prospects, an academy that is the envy of many, but because even with Moshiri on board, resources in terms of spending on players is still limited by regulations in comparative terms versus our peer group (albeit it will be significantly higher than previously) we have to be smarter, and work harder than our peers.

The stadium is evidence of the smarter route, innovative and with what should be a contributory impact on the finances rather than a burden elsewhere. Spurs in fact are likely to suffer similarly to Arsenal at least in the initial years post stadium construction.

As with the players, each and every member of the Board, Executive team, and football management team must take personal responsibility and accept accountability in the years ahead.

If they do so, or are replaced by people more capable and more accountable, then the facts will support the expectation.

One thing is for sure, we shouldn’t change expectations, they should continue and in the eyes of others they should still be unrealistic, but need to change the facts to support them, so that the gap between objectivity and expectation ceases to exist.

We’ll get there, starting tomorrow, 2-0 the Blues.

NSNO.

The recent Spurs’ game and today’s Derby is a sobering reality check in terms of where we are in Koeman’s project. The defeat is still raw but the manner in which it’s being portrayed is not accurate in my book.

I’m going to start by addressing this so called “fear” of playing Liverpool. It’s nothing more than a convenient label that requires no thought or analysis. It’s all so easy for pundits or whomever to say “Everton possess a fear factor, a mental block versus Liverpool”.

Four Everton players had never started a Derby game, so how can they fear or have a mental block about something they’ve never experienced?

It’s a totally inaccurate and lazy way of judging the real problems, which is leadership and accountability as individuals. Yes, football is a team sport, but for a team to function and achieve its objectives each individual has to perform to the level expected – each achieving and completing their given tasks in order to function as a team. Only teams with exceptional talent can perform when one or two players are not at their best. We don’t possess those players currently, and sadly it was more than one or two who didn’t perform. Part of that is down to youth and inexperience, the rest is a reflection on the abilities of the senior members of the squad.

There’s not an Everton player on the pitch today who will have met their individual objectives set prior to the game. That’s what needs addressing.  Koeman and his people have to sit down with each individual and say “we agreed the following…….., yet it didn’t happen. Why did it not happen, and what has to change to ensure it doesn’t occur again?” Now for several it’s probably too late in their careers, particularly their Everton careers to do much about it, but for the youngsters surely that’s the only way they’re going to learn from the experience.

The way to learn from days like today is to take individual responsibility for your own actions, there’s no point in hiding behind the team performance or “fear” – that’s not an accountable action.

To compound the lack of individual responsibility, there was a total absence of leadership on the pitch to identify and address the problem. Leadership has of course been an issue for a long time and will surely be addressed in the summer. The only time today I saw any, was Lukaku of all people, making sure that Lucas did not talk Barkley into the referee’s book early in the first half.

Whilst we have a core of promising youngsters, the paucity of our squad was laid bare again today. Koeman will have put out what he considered our best available team and his tactics probably acknowledged that he’s aware of our relative strengths and weaknesses. However, for the tactics to work, individuals across the team had to perform their given tasks. Having just Gana and Davies in the centre of midfield is a great display of confidence in their abilities. As it happened, it didn’t work – not only did neither not perform to standard but nor did their team mates around them.

We’re surely seeing the last season of Jags, Williams (albeit his first) and Funes Mori in the centre of our defence, either in a back four or a three/five like today – Robles who had a terrible game was left horribly exposed for each of the three goals.

What of Ross? I can only say the occasion got the better of him, perhaps the fact that it was the Derby and the frustrations of his international break got to him. Regardless there are significant behavioural weaknesses to his game that become all too evident on occasions like this. Until he learns that self control and decisiveness in thinking, especially on the big occasion, he’s going to remain a talented but enigmatic figure who won’t meet his full potential.

Romelu? I don’t subscribe to the “he wasn’t arsed” comments but he was horribly isolated even with Calvin Lewin supposedly playing close to, alongside him. I’d say three things to defend his attitude today, his actions in stopping Barkley from receiving an early booking, his reaction to our goal, and in the second half the positions he took up in the box. Holgate had several opportunities to deliver but failed to deliver beyond the first man. Had Coleman been on the pitch, Lukaku would at least have had opportunities. Having said that, he can do better, and if he’s going to fulfil his personal ambitions and opinions, then start putting in match winning performances against better teams. Tuesday night would be a great place to start.

Koeman’s tactics were interesting today – I expressed delight when I saw the side, Barry has a role as substitute in games like today but he can’t be seen as a starter in the really big games. Mirallas has long since ceased to be a starter for Everton in my eyes, although I appreciate the view of some that he at least gets up for games such as this.

It’s clear that Koeman doesn’t believe we can go toe to toe especially away from home against the top 6. His preference, probably determined by personnel rather than through choice has been to play defensively hoping to catch teams on the break. Sadly it’s not worked in any of the games against the top sides away from home this season.

This is a reflection of the inability for most of the squad to perform at the highest levels as individuals in these games, rather than a reflection of the system deployed. Almost all the goals conceded away to the teams above us have resulted from individual error by one, sometimes more individuals.

It’s not until the quality of individuals (mentally as well as tactically) improve through further strengthening of the squad, that we’re going to see significant uplift in performance in these games.

We’ve come a long way since the very dark days of last year’s Anfield debacle and the semi final – “the defining week” as Martinez put it, but we’ve clearly got a huge way further to go.

Being realistic, 7^th in the Premier League is the level at which we are operating. We are currently the best of the rest, and that’s a significant improvement on the last two years but as we all know we need even further changes in the squad, the release of those not good enough, replaced by higher talents.

It felt like the wheels coming off our development project by the end of the game, and it always does feel terrible when losing to Liverpool. The truth is we were horribly exposed by injuries, we don’t have enough depth to our squad, but equally none of our players took the individual responsibility required to perform as part of a team.

When we have a team full of individuals who accept that personal responsibility that’s when we’ll start winning the games that really count, and then perhaps we’ll win some silverware.

As I wrote here last Thursday, and spoke on The Blue Room Podcast with Dave Downie, the scheme announced jointly by Liverpool City Council and Everton Football Club is highly impressive, innovative and brings the stadium at Bramley Moore within touching distance of all Blues.

The dust has settled a little and the focus has turned to at what point Dan Meis will produce first drawings of his proposed stadium, and the view is it will be sooner than later, weeks not months. At the same time, the Council Cabinet has to agree the scheme, the SPV drawn up and funding partners determined.

On funding I’ve already heard that several large institutions, some household names, have been sounded out with positive feedback. As I said in my original piece, this is a highly attractive debt instrument to pension and life assurance companies, ticking all the boxes of a low risk, asset backed, index linked, long term debt product.

Having had time to think it’s interesting to realise that the scheme whilst remaining highly attractive does have several consequences, as yet unexplored by the media.

Whilst not in anyway deterring from the attractiveness of the scheme, several items should be noted:

Security Package

The precise terms of the security package required by LCC are yet to be disclosed. The Rent Deposit scheme requires the building up of “ring fenced” deposits over the first five years of the scheme. Additionally in the very unlikely event that Everton are relegated, then we will be required to top up the Rent Deposit Account using parachute payments paid by the Premier League – I look forward to seeing those details.

Impact on any immediate or near term Board changes and/or exercise of options by Farhad Moshiri

One of the consequences of the timetable suggested last week is that

(i) it is unlikely that Moshiri will exercise his options (allowing him to acquire Bill Kenwright, Jon Woods and Arthur Abercrombie’s remaining shares) any time in 2017. It is widely believed that the options relate to the confirmation of the stadium. Hence, until Planning Permission is granted it seems very unlikely he can/will exercise those options.

(ii) as a result it is unlikely that Bill Kenwright and Jon Woods will give up their seats on the Board. Furthermore, it may be less likely that there are executive changes within the club also.

Use of short term funding loans

For several years, Everton have used short term borrowings from offshore lenders to meet ongoing cash flow obligations throughout the season. This form of lending has relied upon the assignment of broadcasting revenues to the lender. Under the terms proposed by the City Council, LCC will have a first charge on all revenue streams (and assets), therefore this form of lending will no longer be possible.

Now it could very reasonably be argued that this form of lending is not likely to be required in future years given the increased cashflow arising from the new broadcasting deals and Moshiri’s £80 million loan to the club, repairing the balance sheet, nevertheless it will no longer be available to the club once we get our financing package in place.

The Usmanov connection

Regular readers or listeners will know I have always said that Usmanov would not be an equity investor in Everton – he would remain a 30% shareholder of Arsenal FC and therefore not able to acquire any shares in Everton.

The structure of this debt deal confirms this view in my opinion. It would be highly unlikely that such a deal would be put in place (long term structured debt) if there was any prospect of Usmanov becoming an owner/part owner of Everton FC.

As we know, through the Finch Farm naming rights deal with USM there is a connection and I’m sure that related companies may well appear in stadium naming right deals in the future. This deal does not change the prospects of that, but does, I believe, put an end to any thought of him being a shareholder.

I don’t want anyone to get the impression I’ve suddenly turned sour on the nature of the proposed deal to fund Bramley Moore, far from it. I’m hugely excited and impressed by the elegance of the proposed deal, something which would not have been possible without the input of Moshiri and his people I’m sure.

This is a fantastic deal for the club, let it be said, I’m just adding a bit more meat to the bone in terms of the consequences of the deal.

I’ve done several models of the financing of the stadium and future revenues, I’ll put up a new one in the next few days taking into account the nature of this deal and our prospects of further increases in commercial income and match day income through the new stadium.

As it’s Derby week – the contrast between what is proposed for us, an iconic stadium on the Banks of the Royal Blue Mersey, and a trip to a partially redeveloped Anfield will not be lost on any Blues.

Already much has been spoken about the news today concerning Everton Football Club, Liverpool City Council and Peel Land and Property (Ports) Ltd.

I’m going to attempt to reduce it down to the minimum and explain the reasons why certain structures are in place.

Let’s start with the big news – the news that Everton Football Club and Peel have agreed heads of terms which will allow (subject to certain conditions) Everton to build our stadium on the Bramley Moore Dock site.

Briefly this is how the deal works, with explanations below:

• Peel are offering a 200 year lease on Bramley Moore to the “funder”
• Everton Football Club are responsible for finding the funder
• The funder will offer a 40 year lease to a Special Purpose Vehicle created by the City Council
• The funder is responsible for all the development costs of the stadium
• The SPV offers Everton Football Club a 40 year (less one day) sub lease. At the end of this lease Everton can buy out the remaining 160 years of the lease at minimal cost.
• Ownership of the stadium will be with Everton at this point
• Everton pay rent to the SPV. This rent covers two elements, the financing costs and a premium paid to the SPV which covers the cost of providing a guarantee from Liverpool City Council. The financing costs are passed onto the funder and the City Council benefit from the guarantee fees.

The Funder

Who or what the funder is isn’t specified. It can be either a single financial institution like a bank or insurance company, a group of companies, or a high net worth individual or group of individuals. In return for the capital (in excess of £300 million) the funder will see a regular return of capital and income at market rates. Importantly the funder will have this return guaranteed by Liverpool City Council. So should Everton get relegated or football lose its current financial strength, the City Council guarantees payment. (There are security measures also to reduce the risk for the Council, more below).

The Special Purpose Vehicle

Often used in the commercial world. As a separate legal entity it allows businesses and public bodies to park particular projects or investments in a stand alone vehicle. In this case the SPV, owned by the Council collects the rent, pays the financing costs to the funder, and provides the Council with its guarantee fees.

The SPV serves to protect the interests of all parties, largely separate from their other activities.

The role of the City Council

The City Council plays a key role in this whole venture. By offering a guarantee it provides the funder with security against default, thereby reducing the cost of borrowing. As a guarantor the Council charges Everton a fee for providing the guarantee. The cost of the guarantee is calculated by considering the relative differences in the creditworthiness of both the Council and Everton.

The Council receives two benefits from being guarantor. Firstly it creates much needed income for the Council, somewhere in the order of £4-5 million per annum for the period of the lease (40 years). Secondly by enabling Everton to find a funder and thus the stadium development it goes along way to assisting the redevelopment of the whole area – a key objective of the Council.

The Council will also take security from Everton. In addition to the fees payable to the SPV Everton have to put funds aside to protect against future non-payment of their rent. This is not an unusual arrangement, Arsenal for example have a similar arrangement with their funders. In the event of this not being sufficient to meet liabilities, the Council will also hold a charge against future season ticket sales, and all other assets, including players.

Why would Everton go for this type of scheme?

As we get to know a little more about out our major shareholder it is very clear that he brings a level of innovation and sophistication to our business dealings that we’ve not seen since the days of John Moores. A number of things strike me about this deal. It’s elegant and thought through, benefiting all interested parties.

Firstly it’s a great enabler – a scheme backed by guarantee from the City Council, further backed by the resources of an ambitious and likely successful football club is a highly attractive lending proposition. Thus competition should be high and interest costs highly competitive.

It’s very capital efficient both for Everton, and also Moshiri himself. Successful business people excel at making capital work hard, and here’s an example of leveraging up on partners to make his investment in Everton most likely very profitable. For Everton it means not only do we have the funds for a new stadium but we have funds and resources available to continue the development of our squad given the stadium should be cash generative from the moment the doors open.

The scheme also allows us to keep all stadium incomes, participate in non footballing activities, arrange naming rights and potentially be involved in further developments around the stadium.

Don’t get tied up with the idea we are tenants. We are by name because of the nature of the lease arrangement but this is a stadium purchase funded by a long term mortgage. At the end of the 40 years we will own the stadium outright – just like our own homes when our mortgage is paid off.

For the Council, it’s cash generative and is the enabler of significant future development in and around the area – a key objective. This is a highly attractive proposition for the City be in on doubt about that.

The Hurdles

There are self-evidently still hurdles to overcome. Financing I don’t see as an issue given the comments above. Planning, again should not be an issue given the Council support, but it’s fair to say this is the greatest risk or variable to the project. Finally there’s the standard project risks of time management, cost control and mitigation of unforeseen problems. One would think on the evidence to date, Moshiri will bring in a highly competent project management team to deliver on time and in budget.

Timing

It’s estimated the SPV will take another 3 months to be agreed, meanwhile we continue with Dan Meis the stadium design including fan engagement according to Elstone today. Planning is anticipated early in 2018. All being well that might see us playing our first games at Bramley Moore (insert sponsor name here) at the beginning of season 2020/21.

What does it mean for our future?

Simply – everything. It will move us onto the next level in every sense. Our finances will strengthen, our ability to generate income will increase, and we’ll be a highly attractive club, still in touch with our community, still doing great work, but and perhaps as this is our raison d’etre, most importantly being competitive and winners once more.

The club has changed hugely in 13 months with more change to come. Today is a huge, necessary and brilliant step in the next stage of our redevelopment and I for one cannot wait….

As a footnote – one very important thing – the future use of Goodison – absolutely brilliant news:

“EFC intend to use the Stadium move to facilitate a vital Legacy Project at Goodison Park, delivering health, education, affordable housing and public spaces for the local community which is likely to stimulate further investment in the L4 area and will create social, environmental and economic benefits. Details of this will emerge from EFC in due course.”