Everton 2017/18: The Long and Winding Road

He who smelt it, dealt it…

Introduction:

Farhad Moshiri, Everton’s new owner, had a busy year in 2017/18, sacking two managers and trying to make progress on a new stadium for the club.

After sacking Ronald Koeman in October 2017, the club’s fans grumpily tolerated the alehouse tactics of Sam Allardyce that took them from 13th to 8th in the Premier League, and then he too was jettisoned.

To an outsider this seems harsh, but phone ins and social media comments clearly indicated that Allardyce’s pragmatism in achieving results was not enough for a fanbase that had high expectations last season.

Spending restrictions under the previous owner Bill Kenwright were replaced with both managers splashing the cash as never before, and this trend has continued in 2018/19 under Marco Silva.

An analysis of Everton’s accounts shows that the club is in a far better place under Moshiri, but is this enough for them to challenge the ‘Big Six’ or should expectations be more focussed on being the best of the rest?

Key financial figures for year to 31 May 2018: Everton Football Club Company Limited

Income £189.2 million (up 10%).

Wages £145.5 million (up 39%) .

Operating loss £10.2 million (previous year £39.7million profit)

Player signings £214.6 million (up 133%)

Player sales £108.5 million (up 98%)

Owner loans £149.25 million

Income:

Matchday income for a club such as Everton tends to be the smallest element, but is essential for both financial fair play (FFP) purposes and if the club wants to challenge the established elite.

How to increase this income stream is tricky, as it can realistically can only be achieved by higher prices, more fixtures (such as through cup runs of qualifying for UEFA competitions)…or by moving to a bigger venue.

As can be seen from the above graph, Everton’s matchday income rose by 15% last season, as the club participated in, but did not progress too far, in the Europa League.

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Selling tickets at competitive prices has always been a symbol of Everton’s traditional working class fanbase, and this is reflected in the relatively low total of £418 per fan, as the club’s stadium is not presently suited for prawn sandwich consumers.

Relative to Liverpool, Everton only generated 29 pence from each fan for every £1 of matchday income for their rivals from Anfield.

A move to Bramley Moore Dock, which is presently under discussion, is therefore essential if Everton have genuine ambitions at generating the level of income that will allow them to compete at the top table.

Nevertheless, it is difficult to see Everton attracting the number of football tourists, who are prepared to pay higher ticket prices and spend large sums in the merchandise store that will substantially boost matchday income, even if the club does move venues.

Commercial income for Everton rose by 60% in 2017/18, and the reason for this, according to the accounts, is that somewhat surprisingly Europa League income of €14.1 million was allocated to this source, as well as new shirt sponsorship deals from SportPesa and Angry Birds.

Income from UEFA is mainly in the form of central payments which are funded by TV companies, so it would seem logical to perhaps show this money as part of broadcasting income, although we would stress Everton have done nothing wrong with the way they accounted for this money.

Diving into the footnotes of the accounts shows that Everton’s commercial income also included £6 million again for sponsorship of the training complex from USM Services, the Ukrainian metal trading company that is partly owned by Farhad Moshiri, this has caused critics to question the commercial logic of such a deal and mutter about ‘financial doping’ of the accounts.

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Finally, Everton generated money from broadcasting, and like most Premier League clubs, this is the main source of income.

As the club finished one place lower than the previous season, this meant that broadcast income was lower, as the formula for how it is allocated to clubs includes an element that is based on the final position in the table.

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Relative to the clubs who finished around it the table, Everton were an attractive proposition to the TV companies in 2017/18, perhaps initially partly due to the Rooney factor, with 19 Premier League matches being shown live, one more than the previous season.

The club has been quoted as saying that the proportion of total income received from broadcasting fell to 69% in 2017/18 from 76% the previous season, but if UEFA prize money is included within broadcasting this figure has hardly changed.

So, overall, Everton’s income for 2017/18 was broadly in line with the club’s final position in the table and whilst the gap to the next club up (Leicester) will be eliminated as the Foxes are no longer in the Champions League, there is still a £120 million hole before Everton can catch up with Spurs, who will have the benefits of playing at Wembley and a new stadium to boost their finances.

Costs

The main costs for clubs are those relating to players, in the form of wages and transfer fee amortisation.

Whilst Everton’s income rose by 10% in 2017/18, it failed to keep pace with player related costs as the investment of players of the calibre of Sigurdsson, Pickford, Rooney, Walcott, Keane and Tosun came with associated wage demands. Normally there is a big wage jump in the first year of a new TV deal (which commenced in 2016/17) followed by relative stability, but this has not been the case for Everton as Moshiri released the handbrake on player recruitment.

Everton’s average weekly wage (and we fully accept that these are rough and ready figures) jumped from £49,000 to £70,000 a week, putting Everton substantially ahead of Champions League qualifiers Spurs (albeit Spurs figures are for 2016/17).

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As a consequence, Everton’s wages to income ratio increased to 77%, meaning that the club was paying £77 in wages for every £100 of income.

It is not just players who have benefitted from the generosity of the owner, the highest paid director saw their income rise by 57% to £927,000.

By Premier League standards Everton’s board are reasonably well paid, but this pales into significance when compared to Daniel Levy’s package of over £6 million at Spurs, although Daniel’s fan club will no doubt point out this is partially linked to bonuses linked to his amazing success at delivering Spurs’ new stadium on time and budget.

The amortisation cost represents the transfer fee paid spread over the term of the contract signed by a player. So, when Everton signed Sigurdsson for £45 million on a five-year deal it meant that the amortisation cost is £9 million (45/5) a year for five years.

Everton’s annual amortisation cost has tripled since Moshiri acquired the club, showing the extent of his investment in the playing squad.

In using amortisation, it is possible to get a broader feel for a club’s longer-term transfer policy rather than just a couple of windows of buying a selling within an individual season. It would appear that Everton’s strategy is to try to compete with the big six in terms of player investment, although this is an arms race where you have to run to stand still as competing clubs constantly up the ante (apart from Spurs).

The substantial investment made in the fees paid for players meant that if amortisation costs are added to wages, it cost Everton £112 in player costs for every £100 of income generated, leaving nothing to pay the remaining bills of the club, unless there are substantial player sales too or an owner willing to underwrite the day to day expenses.

In terms of player sales, these were substantial, as the departure of Lukaku, Barkley and Deulofeu were the main contributors to a profit of £88 million. The danger with such an approach to funding the club’s day to day costs though is that sometimes it forces the club to be a seller, and also there are no guarantees that there will be buyers for your prize assets at the price you were hoping to sell them for.

Everton had some costs that fans will hope will not be repeated.

  • Sacking Koeman and Allardyce, along with their entourages, did not come cheap, as the club has to pay out £14.3 million to show them the door at Goodison. It had cost the club £11.3 million in 2016 when Roberto Martinez was sacked.
  • There were transfer fee write downs of £8.2 million, not sure who the players are, but no doubt Everton fans have their suspicions and will be able to finger them.
  • The new stadium project progressed during the year, but as usual consultants, accountants, lawyers and other parasites had their snouts in the trough as things crystallised, and this cost the club a further £11.4 million, which hopefully will be money well spent if the plans come to fruition.

Everton borrowed substantial sums during 2017/18. Whilst Farhad Moshiri’s loans are interest free, the club also took out a £43 million loan secured on future TV revenues, and a couple of IOU’s from other clubs for transfers (almost certainly those of Manchester United for Lukaku) were used to borrow money from another lender. Consequently, the club ended up with an interest charge of nearly £120,000 a week on these loans.

Profits and Losses

Profit, if you ask the right accountant, is what you want it to be, and there are as many types of profit as there are flavours of Pringles.

A rough definition is that profit represents income less costs, and if this figure becomes negative it becomes a loss.

The headline figure in the Everton press release was a loss of £22.9 million, although this excluded all aspects of player trading, which, if included, would reduce the loss to £10.2 million, compared to a profit of £25 million in 2016/17. This figure is distorted by the one off factors such as manager sacking costs and profits on player sales that have been discussed above.

Stripping out the above distortions gives something called EBIT (earnings before interest and tax) profit, which is a better measure of recurring profits excluding the one-off volatile items.

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Everton’s EBIT losses worked out at £1,232,000 a week in 2017/18, as the investment in player wages and transfer fees had such a significant impact on costs. This is far in excess of previous years, although could be seen as an investment in players for the future, and if it results in qualification for UEFA competitions could be substantially reduced in future seasons.

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If non-cash costs such as player amortisation are stripped out, the position however improves, and Everton have an EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) profit instead of a loss.

EBITDA is an important profit measure as it is the closest to a ‘cash’ profit that analysts use to assess a business and shows how much the club has to invest in player acquisitions from its day to day activities. Everton have made over £70 million in EBITDA profit over the last six years but have invested more than that in improving the squad.

Player trading:

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According to the accounts Everton spent over £215 million in 2017/18 on player signings, and on top of that Wayne Rooney was recruited on a free transfer. This is almost as much as the club spent in the five previous years put together.

Even taking into account the record domestic transfer fee when selling Romelu Lukaku the net spend was still £106 million.

Compared to their peer group, Everton’s spending is very much as the top end of the table.

Since the end of the season the board have backed new manager Marco Silva with a net £83 million on new signings such as Richarlison.

Funding the club

Clubs usually have a choice between third party loans (which attract interest payments) owner loans (which may or may not charge interest) and shares (which occasionally pay dividends).

In the case of Everton, the club have focussed on owner loans and short term interest-bearing loans.

On top of the sums borrowed in 2017/18, the footnotes revealed that Farhad Moshiri has lent a further £100 million to the club since May 2018. This money has presumably been invested in new players and the ongoing application for a new stadium.

Conclusion

Under Moshiri Everton have certainly moved to a new level of investment, mainly in terms of the playing squad. This wasn’t particularly successful in 2017/18, but there are signs of improvement under Marco Silva as the squad starts to gel together.

Whilst the club is playing at Goodison there is little scope to increase income, and every year until a new stadium is open for business will increase the gap between the club and the ‘Big Six’, all of whom have competitive advantages in terms of income generating capacity and facilities.

Until the new stadium arrives, unless Moshiri is willing and able to underwrite substantial losses (which could cause financial fair play problems should Everton qualify for UEFA competitions) then realistically seventh place and entertaining football is the realistic target for the club.

Everton Financial Results: We Are Glass

Introduction:

In what could have been a good title for a song title by The Cure, 10:30 on a Friday Night is a very odd time for a club to tease out its financial results. Initially there was a press release, full of positives as one would expect, and enough for the media to put out a column or two.

To find out the full details it was necessary to wait though, and that’s something we don’t like because the story has become old news by the time some of the key numbers have been released (Chelsea have just done the same).

Having said that, it was a memorable season for Everton from a financial perspective, as the benefits of new owner Farhad Moshiri’s investment impacted upon both profitability and balance sheet strength. In addition, the club inched closer to a new stadium, which will be necessary financially (although will be a loss emotionally) if the club is going to break through the glass ceiling and challenge for Champions League places.

Key figures for 2016/17:

Income £171.3 million (up 40.9%).

Wages £104.7 million (up 24.6%)

Losses before player sales £12.3 million (down 28.1%)

Player signings £92.1 million

Player sales £54.7 million

Farhad Moshiri investment £150 million (£45 million since the end of the season).

League position 7th (11th)

Everton had a decent season, qualified for the Europa Cup, but were still 15 points off a Champions League place.

Everton are controlled by Blue Heaven Holdings Limited, a company based in the Isle of Man tax haven.

Bluesky are owned by Farhad Moshiri, born in Iran, his family fled the revolution and came to the UK, where he attended university in London and obtained British citizenship (no doubt being part of the migrant ‘problem’ and stealing our undergraduate places according to the Nigel Farage wing of football fans) before a successful career working for some leading accounting firms.

How he made his fortune is unclear, which didn’t stop the Grauniad having a thinly veiled pop at the nature of his investment and the role played by Alisher Usmanov, the minority shareholder in Arsenal. The inference is that Moshiri is influenced/controlled by Usmanov, but there’s no hard evidence to support that.

He then bought a share in Arsenal, before selling it to acquire 49.9% of Everton in 2016, although his loans via Bluesky make him the effective club owner.

How he made his fortune is unclear, which didn’t stop the Grauniad having a thinly veiled pop at the nature of his investment and the role played by Alisher Usmanov, the minority shareholder in Arsenal.

Moshiri also appears in the Panama Papers, which ultimately means nothing, but again fuels the nudge-nudge wink-wink school of cynic.

https://offshoreleaks.icij.org/nodes/80015954

https://www.theguardian.com/football/blog/2017/jan/25/everton-farhad-moshiri-alisher-usmanov-new-money-ownership

Income:

All clubs generate money from three sources, matchday, broadcasting and commercial. For a club such as Everton, with no Champions League benefits and a competitive ticket pricing policy, they are reliant on broadcasting income to a greater degree than the media concocted ‘Big Six’ (ignoring that Everton have won the top division more recently than Spurs).

After effectively treading water from an income perspective for three years, due to the Premier League (EPL) signing a TV deal of that length with BT Sport and Sky, commencing in 2013/14, Everton benefitted from the new deal that kicked in for 2016/17.

The previous season Everton had 68% of their income from TV, whilst not as much as the likes of (Plucky Little) Bournemouth, it was still substantially higher than the ‘Big Six’.

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2016/17 resulted in a £48 million (58%) increase in TV revenues, most of it simply for being in the EPL, but about £8 million was due to increased prize money for finishing four places higher up the table than the previous season.

Only six clubs have reported their results to date for 2016/17, but there is a noticeable increase in the contribution made by TV monies.

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Matchday income from ticket sales fell 20% to £14.1million, despite an increase in average attendances by over 1,000 to over 39,000. This was due to Everton reducing some ticket prices, especially for younger fans.

This is both a decent thing to do from an economic point of view, but also makes sense in allowing more young fans to see the club and increase the likelihood of them coming to see Everton if the move to the Bramley Moore dock stadium, where the club hope to have more than 61,000 seats available. This is dependent upon the move taking place, as costs seem to be rising all the time.

As a result, Everton’s average income per matchday fan dropped from £462 to £359. This also reflects that the club’s present facilities are not geared towards attracting large numbers of corporate fans, who pay premium prices to watch the game. Whilst there’s no love lost by regulars of any club towards the prawn sandwich brigade, the chinless wonders who occupy those seats can contribute towards the budget for players and other facilities.

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A problem for Everton is the new stadium is not expected to be available until 2022. Generating about £50 million a season less than local rivals Liverpool from matchdays does put the club at a significant disadvantage if wanting to break into the Champions League contenders.

https://www.theguardian.com/football/2017/dec/31/everton-new-stadium-costs-escalate-2022-target-bramley-moore-dock

Commercial income increased by £5.3 million (24.5%). On the face of things this looks impressive, but all is perhaps not as it seems. The club signed a deal to sponsor the training ground name, which generates an impressive £6 million. This deal was signed with USM Holdings, controlled by Alisher Usmanov.

Under normal circumstances this would have Arsene Wenger’s handlers reaching for his straightjacket and the padded cell, as he would be dragged away muttering incoherently about ‘financial doping’ as he has done in the past in relation to Manchester City’s eyebrow raising commercial and naming rights deals with Etihad Airways.

It would be cynical to suggest that Wenger seems less concerned when the unusual naming rights deal comes from a major shareholder in his own club Arsenal…

Costs:

The main costs for a club are in relation to players, and come in the form of wages and player amortisation.

Wages in total rose by a quarter to £104.7 million. Only a third of clubs have reported their details to date for 2016/17, but it does seem that Everton did invest in the squad in terms of their payments to players for the season. What is noticeable is that in 2015/16 Everton’s wage bill was only 2% higher than that of Stoke, in 2016/17 this gap had increased to 23%.

This suggests that Moshiri’s commitment had found its way to the player budget, but the extra income generated ensured that that wages as a proportion of revenues actually fell to 61%. This compares to a Premier League average of 67% in 2015/16.

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The wages increase might explain the USM sponsorship deal too. Under Premier League rules, clubs can only increase their wage bill by £7 million plus any increases in non-broadcast income plus the average gains from player sales over the last three years.

This is known as the Short-Term Cost Control (STCC) rule. (Anyone wanting to read it is welcome to look at page 116 of the Premier League 2017/18 Handbook, but I’m sure you’d rather pick your feet to be honest, it’s more enjoyable).

The aim of STCC is to prevent all the increases in TV monies going straight through to the pockets of players and agents. Instead the increase in this revenue stream will go to either fans in the form of lower ticket prices (kudos here to Everton) and/or club owners (because multi-millionaires need extra cash too).

For Everton, with a wage bill increase of £20.7 million, the STCC rules are satisfied as follows.

£’m
Annual increase allowed 7.0
Increase in sponsorship income 5.3
Decrease in matchday income (3.5)
Averaged three year gain on player sales 21.0
Total 29.8

Everton were therefore well within the rules for 2016/17, due to both the USM sponsorship and the sale of John Stones to Manchester City.

The other player related expense is that of player amortisation. This is the cost of signing a player spread over the length of his contract. Everton’s biggest signing in 2016/17 was Bolasie from small London club Crystal Palace for £25 million on a five-year contract. This works out as an amortisation charge of £5 million per year for five years.

In our view amortisation is a better measure of player investment than net player spend, as it smooths out individual transfers over a longer period of time, and shows the trend in terms of player investment.

The downside of focussing on player amortisation is that it ignores the impact of academy players and Bosman deals on the strength of the squad (but so does net player spend TBH) as these involve zero cost and therefore zero amortisation.

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Following a previously seen trend in relation to Everton, the club broadly plateaued between 2014-16, but the new TV deal and owner investment allowed the club to commit more to player signings and therefore amortisation in 2017.

We would expect this figure to accelerate significantly in 2017/18 due to the £150 million spend on new players during summer 2017.

Directors pay

One beneficiary of the extra monies at the club is that of the highest paid director. The club does not name the individual (there is no legal requirement to do so), but our money is that Chief Executive Robert Elstone is the likely person. His salary increased from £400,000 to £588,000.

That’s clearly a significant pay rise, but in 2015/16 the average pay for an EPL chief executive was £1.4 million, so he is relatively underpaid for the job he does (and it has to be said he’s a thoroughly nice chap too).

Profits and losses:

Losses are income less costs, and were £12.3 million last season, or £236,000 a week, before taking into consideration player sales, mainly that of John Stones, of £54.7 million.

We tend to look at what is called EBIT (Earnings Before Interest and Tax) as a main profit metric, as this removes the volatility of player sales and one off expenses (for example, Everton paid out £11.3 million in 2016 to Roberto Martinez and his team when the manager was sacked, this expense is excluded from EBIT as it is non-recurring in nature).

Everton have made EBIT losses of £35.5 million over the last five years, which explains why they have sold players to balance the books. Total gains on player sales during the same period were £107 million.

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There’s a case for saying that EBIT profits are too harsh, as it excluded player sales but included player acquisition costs in the form of amortisation.

It’s therefore also useful to consider EBITDA (EBIT with player amortisation and the depreciation of long term assets such as property and equipment) in addition to EBIT. This shows a healthier position for the club, which made an EBITDA profit every year.

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Player trading:

2016/17 was a record year for Everton (although will be surpassed by 2017/18). The club purchased players for £92.1 million, and had sales of £54.7 million, to give a net spend of £37.4 million. Although the gross figures are higher than in previous years, the net spend is in line with that of recent years.

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Everton seem to make a number of signings which are performance related. At the start of the 2017/18 season they were committed to additional payments for players, usually linked to appearances, trophies/Champions League qualification, international caps, loyalty bonuses and so on. This could cost the club £50 million if all the conditions are achieved, and we suspect that the fans would be more delighted than the finance department if those payments had to be made.

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Even after selling Lukaku to Manchester United, Everton did spend a net £60.6 million on the squad in summer 2017. On top of this Wayne Rooney arrived on a free transfer, so expect a major increase in the wage bill in 2017/18.

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The Owner:

Farhad Moshiri’s total investment is a mix of shares and quasi-loans. He paid £87.5 million for his 49.9% investment in 2016, but this money was to existing shareholders rather than the club itself.

His main action has been to pay off the bank loans of around £55 million, and replace them with an interest free advance of £105 million. During the summer of 2017, after the club’s year end, he advanced a further £45 million to fund player signings.

The early repayment of the bank loans was both good and bad news for Everton. The club had being paying out interest costs of £100,000 a week prior to Moshiri taking over, and this saving can therefore be invested in the playing squad. The banks did however charge a penalty fee £6.6 million for early repayment of the loans, revealing themselves to be a bunch of cockjuggling thundercunts harsh negotiators.

The club also took out a loan with a Chinese bank after the year end. Whether this is dipping the toe into the water in terms of financing the new stadium is yet to be seen.

Following Moshiri cleaning out the debts we estimate that the club is now worth £375 million, using our version of the Markham Multivariate Model. Given that the club was valued at £175 million when the takeover took place less than two years ago, plus £115 million in quasi-loans from Moshiri, it is a decent return on his original investment.

Summary

Everton are trying to be upwardly mobile as a result of new club ownership. To be realistically competitive for a Champions League place on a regular basis is unrealistic if the club continues to be based at Goodison, where the restrictions in terms of capacity and corporate income streams are an ongoing constraint.

By the time the Bramley Moor dock stadium is opened (and we’re assuming 2022 as the earliest date) Manchester United, Manchester City, Arsenal, Spurs, West Ham, (and possibly Liverpool and Chelsea) will have 60,000 plus capacity stadia too, and all will be aiming for those top four spots too. Having a large capacity stadium is no guarantee of success, just look at some of the clubs in the Championship.

Everton’s wage bill is currently less than half of the largest clubs, and it’s difficult to see how that gap will be eliminated in the short to medium term.

The Numbers

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