Why Has Nobody Bought Everton?

While the focus on Merseyside has been on Liverpool, both in terms of their likely failure to qualify for the Champions League and the financial doom and gloom arising from the Hicks and Gillett regime, people seem to have overlooked what is happening at Goodison Park. Not only have Everton recovered very well after a dreadful start to the season, including a memorable dismantling of Manchester United, but they also have issues of their own off the pitch. Their financial problems may not be quite so spectacular, but the fact is that Everton’s business model is bust. Their strategy, for want of a better word, appears to be to run the business at a loss every year in a gamble to achieve success on the pitch and to fund it by steadily increasing their debt. Every now and then, they might accidentally make a profit, but only at the price of selling one of their prize assets, the best/worst example being Wayne Rooney five years ago. From a commercial perspective, it is difficult to see how the club will prosper in the future – unless they find a wealthy benefactor.

That is why leading theatrical producer, “True Blue” Bill Kenwright, who has been Everton chairman since 2004, formally put the club up for sale in 2008, when he appointed Keith Harris of the investment bank Seymour Pierce as broker, but Everton has effectively been on the market for many years. The reasons are obvious, but Kenwright explained why his “kind of chairmanship” no longer has a future in the rich men’s playground known as the Premier League: “I am a pauper when it comes to other chairman. I want this club to have a billionaire owner, but it’s not me and I apologise it’s not me. Everyone knows this football club needs investment. If I can sell it, it will be sold tomorrow”. If this had not been evident before, it became abundantly clear with the arrival of Sheikh Mansour’s billions at Manchester City, which has starkly highlighted the limited budget available to David Moyes.

"Here comes the sun"

So why has nobody bought Everton? After all, this is a club with a fine tradition, having been winners of the old First Division nine times, the FA Cup (when it meant something) five times and the European Cup-Winners Cup once in 1985. As the song goes, “if you know your history”, but it’s not all old news, as Everton were the last team to break the Big Four stranglehold on Champions League places in 2005, came fifth in the Premiership for the last two seasons and were finalists in the FA Cup only last year. In David Moyes, they also have a very good manager, who Kenwright described as “the most important figure at the club”. It is certainly true that Moyes is responsible for taking the club to the upper echelons of the league, but paradoxically his ability could be considered a strength and weakness, as there is always a risk that he could leave for pastures new. Recently, he appeared to break ranks for the first time, “It’s getting harder to keep up with the Joneses. I want to be involved in a football club which makes progress”.

Even the man tasked with selling the club, Keith Harris, admitted that Everton were not football’s most attractive prospect, “The demographics of Liverpool as a city are not hugely compelling. It is not a very wealthy city. Everton share the city with another club, which arguably has been in the vanguard for the last decade, and they both have a stadium to build. So the economics need a lot of looking at”. They have a loyal, but parochial support, with no identifiable image or brand, which was not helped by the UEFA ban on English clubs in the 80s, which prevented Everton from taking their rightful place in the European Cup.

"I'm reviewing the situation"

In fact, Harris confessed that he was making “no progress at all”, exacerbated by the credit crunch, “It has never been more difficult to find buyers. It's no longer a question of price negotiation - it's should we? People are wondering if now is the time to spend”. Kenwright agreed, “We aren't living in a normal world. I am talking to people every week, but in the last few months it's been 'We want a deal done in the next week' and then you literally don't hear from them again. There's just no money”. That may be true, but it does not take long for hard-nosed financial investors to appreciate that this club simply does not make money. Move along, nothing to see here. They walk away even more quickly once they have noticed the club’s growing debt and realise that they would have to fund the building of a larger stadium.

Ah, the new stadium. Everton had proposed building a new 50,000 capacity ground as part of a retail park in Kirkby, on the outskirts of Liverpool, but in November the government rejected their planning application. This was a real blow to the club, as they had been putting all their energies into this scheme for the last three years. Former chief executive Keith Wyness had gone so far as to describe it as “the deal of the century”, because Tesco were going to pay £52m of the construction costs, leaving Everton to find “only” £78m. Wyness argued that much of this money would have been raised by selling Goodison Park and Bellefield, the club’s former training ground, and charging for naming rights at the new stadium. Any debt would be “easily” serviced from the increased earnings at the larger ground. On the face of it, this rejection seems disastrous, as the supporters have been told, “There is no Plan B”, but now “the book is closed” on Kirkby. Current chief executive Robert Elstone had made this very plain, “If this club is going to compete at the top end of the Premier League, we need a favourable decision”.

"Brave new world?"

This is the third time in 13 years that a proposal for a new ground has come to nothing, but this rebuff might just be a blessing in disguise. Many fans never warmed to the idea of moving to Kirkby, which prompted the formation of the “Keep Everton In Our City” (KEIOC) campaign. Their opposition was explained thus, “This was a location issue. This stadium would have been nine miles outside the city centre, further from a city centre than any other Premier League ground”. Their concerns were shared by Liverpool Council, who would also prefer a central site. A better alternative for the supporters was the proposal to build a new stadium on Liverpool’s prestigious King’s Dock, but that scheme was scrapped when the club failed to raise sufficient money.

Which brings us to the question of how exactly Everton would have funded Kirkby. We’re none the wiser after the planning inquiry, as the club refused to explain how they would meet the construction costs on the grounds (sic) of “commercial sensitivity”. The sale of Goodison is unlikely to make “loadsamoney”, as it is situated in a far from salubrious area with boarded-up terraced houses, while their hopes of redeveloping their former training ground for housing were dashed when the application for planning permission was refused (there’s a trend here). The idea of securing big bucks for naming rights also appears a little far-fetched when you consider the low money paid for shirt sponsorship. If by some miracle the club did manage to cobble together the funds, all it would do is further inhibit their capability to spend money on new players.

"My hands are tied"

On the other hand, a brand new, state of the art stadium (or even planning permission) should “improve the club’s financial position, attract investment and provide more money for the manager”. According to a club spokesman, “Any club which can boast a stadium which is modern, fit for purpose and capable of expansion does represent a more attractive proposition to potential investors”. Indeed, the club’s second largest shareholder, Robert Earl, the Planet Hollywood entrepreneur, said that he would not put further money in until the club had moved to a new stadium. Kenwright explained the economic facts (as Rafa might say), “I don’t want to be the guy that takes the club away from Goodison Park. I would sooner stay here personally, but it is not an option financially”. In the same way that Arsenal had to leave Highbury for the Emirates, Everton need to relocate to a stadium with more commercial opportunities and higher match day revenue.

Something has to be done to boost the club’s revenue, as the profit and loss account looks simply awful. Last year, even when the club reported record turnover of £79.7m (an increase of £4.0m on the previous year) on the back of a pretty successful season, they still suffered a loss of £6.9m. This is nothing new under the sun, as Everton have only managed to record a profit once in the last seven years – and that was only due to Wayne Rooney’s big money transfer to Manchester United in 2005. Since “Wazza” was sacrificed, there have been £27.1m of cumulative losses (2006 - £10.8m, 2007 - £9.4m, 2008 break-even, 2009 - £6.9m). Although revenue has significantly increased over the years, thanks to the arrival of Sky television money, this has been matched by spiralling costs. In 1999 Everton reported a loss of £10.7m on turnover of just £25.6m, so in the last ten years revenue has risen by a remarkable £54.1m, but less impressively this has only produced a slightly smaller loss.

"From Hair to Eternity"

The main reason for the cost growth is player wages, which rose by 10.3% last year alone from £44.5m to £49.1m. This “significant investment in the playing squad” gave rise to a higher wages to turnover ratio of 62%, which is nowhere near the worst in the Premier League, but is far from comfortable, even if the club considers it “appropriate”. On top of the salary levels, headcount is also increasing from 210 to 226 with “players, training and management” rising from 80 to 86. As a small compensation, at least the director’s remuneration, presumably Kenwright’s, has reduced from the £450k average of the last three years to “only” 244k in 2009. However, costs have not been helped by wasting nearly £3m on fees incurred for the design and planning of the failed stadium bid (£1.5m in 2008 plus £1.3m in 2009).

The losses over the years would have been even higher if the club had not been selling players. Over the last five years. £40m has been contributed by what accountants call “profit on disposal of players’ registrations”. The impact was most obvious in 2005 when Rooney’s sale resulted in a net profit of £23.5m, but you can also see its importance in the last two years. The club just broke-even in 2008, thanks to £9.2m profit from player sales, but reported an overall loss of £6.9m in 2009, when the profit from player sales was much lower at £3.8m (principally from the sale of Andrew Johnson to Fulham). This bodes well for next year’s results, which will include the £22m sale of Joleon Lescott to Manchester City.

"Moyes has just been told his budget"

This has not stopped the club buying players and Everton have somehow found £84m in the last five years to improve the squad. This does not include £11.8m of contingent liabilities, which will be payable based on future appearances and loyalty bonuses, which would bring the total to nearly £100m. In the accounts, costs associated with buying a player are capitalised as intangible fixed assets and written-off over the length of the contract, as the assumption is that the player would have no value after his contract expires, since he could then leave on a “free”. As an example, John Heitinga was bought for £6m, so if we assume that was on a 4-year contract, £1.5m costs would be booked to the accounts in each of the next four years. Although costs of buying a player are not fully reflected in the accounts in the year of purchase, over time the amortisation costs can have a real impact, which is what has happened at Everton with these costs rising from £12.3m to £13.0m in 2009. That’s a lot in the context of a £6.9m loss.

Kenwright is quite open about this policy in the annual report, “Once again, every available penny was channelled towards the manager to facilitate the upgrading of the senior squad”. This could be seen in the period covered by the last accounts with the record £15m purchase of Marouane Fellaini. Since then, the bulk of the Lescott money has been spent on Sylvain Distin £5m, John Heitinga £6m and Diniyar Bilyaletdinov £9m, but the tap might be closed for a while, given Moyes’ remarks during the January transfer window, “We will be trying to get some players in January but they will probably all be loans. We won't be buying anyone, we don't have those finances”. That’s one of the problems: the only way that Everton have managed to buy these players is by taking on more debt, but Kenwright himself has admitted, “I can’t go on every year as I have been doing, borrowing for transfer funds for David Moyes”.

"No business like show business"

Net debt did actually increase slightly in 2009 from £36.8m to £37.9m, which is nothing compared to the £237m debt at Liverpool or £716m at Manchester United, but it is meaningful, as the club appears to have no way of paying it off. In July Kenwright admitted, “Our debt is a big debt and a worrying debt. It is manageable because of our performance on the field, but it is too much debt that every year is going to be added to”. The debt largely arises from a £30m 25-year loan arranged by Bear Sterns in 2002, which has the advantage of being long-term with a fixed interest rate of 7.79%, but has contributed towards a net interest charge of £4.1m last year (up from £3.9m). In fact, in return for the £30m loan, Everton will end up repaying £68m. The accounts also reveal one other obvious reason for the club’s need to borrow – they have no cash at bank. Nothing, nada, zilch. Not a surprise, given that the cash flow has been negative for the last four years: 2009 - £1.8m, 2008 - £10.9m, 2007 – 4.7m and 2006 - £5.3m. The last time that the cash flow was positive was 2005, due to, guess what, the Rooney sale.

To be fair, Everton control costs quite well, but their revenue lags way behind other major clubs. The 2009 turnover of £79.7m may have been a record for the Toffees, but it’s significantly lower than the Big Four (Manchester United £279m, Arsenal £224m, Chelsea £206m and Liverpool £185m). Fair enough, they benefit from the riches of the Champions League, but Everton are also a fair bit under their peers (Spurs £113m, Manchester City £87m and Aston Villa £84m). They’re even outperformed by Newcastle £86m – who play in the Championship. How can Everton hope to compete on their level of revenue?

Even where revenue has grown considerably, as with broadcasting increasing from £27m in 2007 to £49m in 2009, this has little to do with the club, being down to the collective Sky Premier League agreement. Everton has a huge dependency on television, more so than other clubs, with 61% of their total revenue coming from this stream, but it just about covers the wage bill. This will further rise in the next three years by at least £7.5m per annum, thanks to the recent agreement on overseas rights, but Everton would have to qualify for the Champions League to earn the really big money (another £25m). This is why we have a number of clubs building up debts in order to reach the heady heights of the top four – but they aren’t all going to get there …

Although the club promised to improve its commercial operations a few years ago, it remains feeble at £9.2m, up just £0.5m from the prior year. As a comparison, Spurs earn £29m commercial revenue. To be fair, the club outsourced its merchandising and catering operations in 2006 and its retail business to Kitbag in 2009, which mean that they receive a lower net income from subcontractors, but even so. Everton boast that their shirt sponsorship deal with Chang is the third longest running in the Premier League, but strangely do not mention where they stand in terms of revenue. It’s definitely a lot less than the deal Liverpool recently signed with Standard Chartered Bank – one promise that Christian Purslow actually has delivered on.

"The Story of the Blues"

But where Everton really fall down is match day revenue, which was only £21.9m last year, even though it rose 7%. It may be even lower next year, following the team’s early exit (4th round) from the FA Cup, though this may be offset by their progress in the Europa League. To place this into context, Manchester United and Arsenal both earn more than £100m from match day revenue, while even Liverpool, whose ground is not much larger than Everton’s, managed to gather £43m.

This is the reason why Everton must still look at other options for their ground. Plan B was always to remain at Goodison Park and refurbish their traditional home, but this really would be a case of making the best of a bad job. Limited by a capacity of only 40,000, which is effectively even lower, due the large number of seats with a restricted view, it also does not possess any quality corporate areas for money-spinning hospitality. The ground itself is hemmed in by Victorian housing (and a church) and supported by an inadequate road network. In short, there is no feasible way of transforming Goodison into a modern stadium.

Even if Kirkby had gone ahead, it would not have generated much additional revenue. A study performed by Deloittes on behalf of Everton estimated a paltry £6m extra a year and that was based on the club almost filling the 50,000 stadium every match. That would represent an appreciable increase from last season’s average attendance of 35,667 (down from 36,904 in 2008), so Everton cannot take for granted an increase in crowds, unlike, say, Tottenham, whose proposed new ground is partly justified by their waiting list of 23,000 for season tickets.

"Show me the money"

Others, including Liverpool Council and KEIOC, believe that an alternative location in the city centre can still be found. Although this would be expensive, the suggestion is that it could be financed by some sort of mortgaging scheme, e.g. selling seats for the next 25 years. The council has also indicated that it would favour a ground-sharing scheme, given the financial troubles of both Liverpool clubs. This has worked well on the continent for many years in Milan and Rome and more recently in the Allianz Arena in Munich, where the stadium glows red when Bayern play, and blue when it’s the turn of 1860. How appropriate. However, some worry that this would be detrimental to Everton’s brand, if they were perceived as the junior partners.

What other assets do Everton have? In short, not many. The balance sheet has been deteriorating for a long time with net assets of £18.5m in 1999 declining to net liabilities of £26.7m ten years later. The club takes great pains to emphasise the long-term nature of their loans, but the net current liabilities are also at a record high of £37.4m. Most of the club’s assets have been sold off (the training ground, the academy at Finch Farm and the Megastore), which also increases costs for higher rents, while Goodison’s value is declining. The only assets left are the players themselves with intangible assets now up to £39.4m. Nothing has been included in the accounts for home grown players, but the horrible truth is that any (financial) value would only be realised if the player were sold. What price a debt reducing, balance sheet strengthening sale of Jack Rodwell to Arsenal or Manchester United for £15m this summer?

"Say Hello, Wave Goodbye"

There appears to be no way out for Everton short of a wealthy patron buying the club, described by the Bundesliga chief executive as “the greater fool theory - some day a greater fool will come and buy the club”. At least, Everton have not sold out to leveraged buy-out vultures like the Glazers or a buffoon like Mike Ashley, but the club deserves somebody more financially astute than Kenwright, who unbelievably stated, “I do not understand why football clubs have such big debts, it is a mystery”. Indeed, some fans are growing suspicious of Kenwright’s numerous claims that he is looking for an investor (“Every name you see that has been out there looking for football clubs, we’ve spoken to them. We’ve had people in the Far East, America, Switzerland, Japan …”). When challenged on this at the 2009 AGM, Kenwright’s incredible response was, “I’m not answering your question. I’m bored with your question”.

Whoever buys the club would need very deep pockets. First, they would have to buy out the directors’ shares (Kenwright 25%, Earl 23%, John Woods 19%), but they would also have to repay the loans, fund a new stadium, pay for new players and inject working capital. Not a very appealing prospect from a financial point of view. Just look at Randy Lerner at Aston Villa: he paid £63m to takeover the club, but has since pumped in another £200m to improve the squad – without spending anything substantial on the stadium.

This is a major issue for Everton, as the other clubs striving to break through the glass ceiling all have rich sponsors (Villa – Lerner, Spurs – Joe Lewis, City – Sheikh Mansour). As Kenwright put it in the annual accounts, “maintaining our progress, continuing to punch above our weight will be very difficult”. He added, “At the end of the day, the club’s finances will be key to everything”. If that is indeed the case, Everton’s fans might have to settle for mid-table mediocrity, unless Moyes can continue to “work miracles”.