Tuesday, January 24, 2017

Ipswich Town - Stuck In A Moment

This has been a challenging season for Ipswich Town, as they have been poor in the league and recently suffered a humiliating, televised defeat in the FA Cup against non-league Lincoln City. Manager Mick McCarthy appears to retain the support of the board for the time being, but he has clearly lost many of the fans.

This feels a little harsh on the experienced Yorkshire man, who has arguably enabled Ipswich to punch above their weight during his tenure. When he replaced Paul Jewell in November 2012, Ipswich were bottom of the Championship, but McCarthy successfully guided the club out of the relegation zone to finish in a comfortable 14th place.

Since then he has registered three successive top ten finishes. His first full season in 2013/14 ended in a respectable ninth place, before he led them to the play-offs in 2014/15. Last season Ipswich came a somewhat disappointing seventh, but this was still ahead of many wealthier clubs.

As McCarthy pointed out, “This is the first year that it’s been a struggle.” To an extent, he has been a victim of his own success, as he reached the play-offs on a shoestring budget, getting the most out of a fairly average squad.

"Merry Christmas, Mr. Lawrence"

This reinforced the cautious approach of Marcus Evans, who has frequently spoken of his determination to take Ipswich to the Premier League since he bought 87.5% of the club in December 2007, but has equally often been accused of lacking the ambition to do so.

Evans summarised his philosophy last month: “My view, based on the finances available to us compared to those with parachute budgets and the small group with, often short term, huge owner investment, is for the club to maintain a sustainable and consistent strategy, which I firmly believe provides a foundation each season for a promotion challenge.”

He then outlined the key elements of his strategy, “In summary, a focus on the Academy; a competitive wage structure; careful use of our transfer budget on developing players and a stable management team are factors which I believe provide us with the best chance of promotion out of the Championship, which is one of the toughest - and getting even tougher - leagues in the world.”

Managing director Ian Milne was singing from the same song sheet: “Marcus has gone for sustainability and Mick understands that. You can achieve good things through getting the right people in your club and working as a team from top to bottom.”

"A Grant don't come for free"

While all this is undoubtedly true, the concern is that this conservative stance will mean a continuation of the 15-year groundhog day existence that Ipswich have held in the Championship (or equivalent) since relegation from the top flight in 2002. To paraphrase U2, it feels like Ipswich are “stuck in a moment – and they can’t get out of it.”

Initially, Evans provided his managers with enough funding to be competitive in the transfer market, but this did not achieve the desired objective, as first Roy Keane, then Jewell essentially wasted the owners’ cash with a series of poor choices. Not only did these expensive purchases not deliver on the pitch, but they ended up being offloaded for peanuts, leading to large financial losses arising from misplaced recruitment.

Having had his fingers burnt, Evans opted for a change in strategy: “I wanted to work with a manager who was going to try to and coach and make our players better, rather than give the manager the opportunity (to simply buy players).”

"Don't Luke back in anger"

The owner explained: “You would have hoped that money had resulted in better things, but look at Nottingham Forest – they lost £25 million last year and got nowhere. There are a lot of clubs out there that spent a lot more than Ipswich did and who ended up in exactly the same situation.”

The drive to more sensible cost management was also influenced by the introduction of the Financial Fair Play rules, which essentially aim to force clubs to live within their means.

As a result, in the past few years Ipswich have focused on free transfers, loans and swap deals, while trying to bring through young players from the Academy into the first team. As Milne explained, “We do have a very good scouting network and that enables us to get players at the minimum transfer fee.”

Consequently, Ipswich have averaged annual gross spend of only £0.5 million in the last four seasons (though the January 2017 transfer window has not yet closed), compared to £5.6 million a season in the first three years of the Evans era. In the same periods, average net spend of £4 million has flipped to average net sales of £4 million, an £8 million reduction.

Last summer’s spending was a good example of Ipswich’s policy: two promising young players were acquired in the shape of Grant Ward from Tottenham Hotspur and Adam Webster from Portsmouth at a combined cost of £1.4 million, while there were a couple of free transfers, including the veteran journeyman Leon Best from Rotherham United.

Evans argued that there was also money splashed out on loan fees and wages needed to tempt Premier League clubs to release players, including Welsh internationals Tom Lawrence (from Leicester City) and Jonny Williams (from Crystal Palace) and Conor Grant (from Everton), but Ipswich supporters would justifiably point out that the club failed to replace forward Daryl Murphy, who was sold to Newcastle United.

Ipswich’s parsimony can be seen by looking at the gross spend of Championship clubs this season, when only six clubs spent less than the Tractor Boys. These included two clubs with transfer embargoes (Blackburn Rovers and Nottingham Forest) plus a few “minnows”, i.e. Preston North End, Burton Albion, Rotherham United and Wigan Athletic.

The more meaningful comparison is with clubs seeking promotion, as Evans himself noted, “Newcastle and Norwich spent more than £100 million between them on transfer fees in the August window as they chase an immediate return to the Premier League.” Although this was actually factually incorrect, his point was still valid as Newcastle and Aston Villa have spent £55 million and £52 million respectively. Other big spenders include Fulham £22 million, Derby County £14 million, Wolverhampton Wanderers £11 million and Bristol City £11 million.

Many managers would use this low spending as an excuse for not meeting their objectives, but McCarthy is made of sterner stuff, saying that he won’t “stamp his feet” over the restricted transfer budget given to him by Evans. Instead, he sees it as his job to get more out of the players he’s got.

That said, he would like his achievements to be recognised: “I’ve done a bloody good job under the terms and conditions. I’ve sold Murphy, I’ve sold Mings, and others, and we’ve stayed competitive.”

Despite this prudent policy, Ipswich reported a £6.6 million loss in 2015/16, a £12.1 million deterioration from the previous year’s £5.5 million profit, though this was almost entirely due to a £11.5 million reduction in profits on player sales. These dropped from £12.2 million in 2014/15, due to the sales of Tyrone Mings to Bournemouth and Aaron Creswell to West Ham, to only £0.6 million.

The wage bill rose by £0.6 million (4%) from £16.0 million to £16.6 million as “further funds were invested in the squad to challenge for the play-off positions.” Other expenses also increased by £0.3 million (6%) to £5.4 million, but player amortisation dropped by £0.5 million (74%) to just £0.2 million.

Revenue slightly decreased by £0.1 million (1%), mainly due to a £0.4 million (9%) reduction in commercial income to £4.4 million, offset by broadcasting income rising by £0.3 million (6%) to £5.4 million. Gate receipts were unchanged at £6.5 million, as the club’s share of receipts from the League Cup tie against Manchester United at Old Trafford compensated for a fall in attendances and the money from the previous season’s play-off appearance.

Although a £7 million loss might not sound  overly impressive, it has to be assessed in the context of England’s second tier, where the harsh reality is that most clubs are loss-making, largely as a result of their natural desire to reach the lucrative Premier League.

In this way, none of the Championship clubs that have so far published their 2015/16 accounts has been profitable with some reporting hefty losses: Brighton and Hove Albion £26 million, Hull City £21 million, Reading £15 million and Bristol City £15 million. As Evans lamented, “Wouldn’t it be nice… if you could turn a profit in the Championship, but I’m afraid that’s not the case.”

One way a football club can compensate for operating losses is via player sales, but Championship clubs have struggled to make big money sales with the highest amount reported so far last season being Hull City’s £13 million – and they had Premier League players to offload following relegation in 2015.

However, Ipswich’s profit on player sales of £0.6 million was one of the lowest in the division – in contrast to 2014/15 when their £12.1 million profit was only surpassed by Norwich City’s £14 million. Of course, next year’s accounts will be boosted by the £3 million sale of Daryl Murphy to Newcastle.

Ipswich have only reported a profit once in the Evans era, the £5 million in 2014/15, losing money in the other eight years. However, it is noticeable that the losses have been reducing, effectively capped at £7 million in the past three seasons.

As Milne explained, “In 2012 the annual losses peaked at £16 million and we started to go down a slightly different route.” That was actually the third worst loss in the Championship that year and served as a major wake-up call.

The reason for this large deficit were given by finance director Mark Andrews, “We brought in some experienced players in the 2011/12 season, Paul Jewell’s first season in charge, which kept the playing squad costs high.”

However, Ipswich’s best results in recent times have been boosted by large profits on player sales, as seen in 2014/15. Without the sales of Mings and Cresswell, the reported profit of £5.5 million would have been a loss of £6.7 million, i.e. in line with the £7 million losses in 2013/14 and 2015/16.

It was a similar story in 2011/12 when this activity contributed £10.8 million, largely due to the transfers of Connor Wickham to Sunderland for £8 million and Jon Walters to Stoke City for £2.75 million. Without these sales, Ipswich would have registered another big loss of £14 million.

The owner has said that his funding “would eventually be unsustainable without the benefits of transfer revenues from time to time to offset the club’s running costs.” Interestingly, the club has made more money from cheap, young players rather than experienced professionals. This was acknowledged by Evans: “We lost some good players in the past who were out of contract”, i.e. could leave for very little or even nothing.

To get an idea of underlying profitability and how much cash is generated, football clubs often look at EBITDA (Earnings Before Interest, Depreciation and Amortisation), as this metric strips out player trading and non-cash items. In Ipswich’s case this highlights the changed strategy after 2012, as EBITDA has improved from  minus £9 million in 2012 to minus £6 million in 2016 (though this was a million worse than the previous year).

This might not sound overly impressive, as it is still negative, but it has to be put into the context of the Championship, where very few clubs manage to generate cash. Apart from Blackpool with their “unique” approach to running a football club, no Championship has reported EBITDA higher than £1.5 million in the last two seasons (in stark contrast to the Premier League where in the same period every club enjoyed positive EBITDA, except the basket case that is QPR).

Revenue has fallen by £1 million (6%) from the recent £17.2 million peak in 2011, which was boosted by reaching the Carling Cup the semi-final and a profitable FA Cup match at Chelsea.

All revenue streams have fallen since then, especially commercial income, which is 13% (£0.7 million) lower, though this is partly due to a decision to outsource catering (and thus only including net royalty payments in revenue). Gate receipts have rebounded, even though attendances have fallen, partly due to ticket price increases.

Following the slight reduction in 2015/16, Ipswich’s revenue of £16 million remains firmly in the bottom half of the Championship, a long way behind the top three clubs, who all earned more than £40 million. Of course, to a large extent, this only demonstrates the importance of parachute payments for those clubs relegated from the Premier League.

This is clearly a sore point for Evans, “The average parachute club starts with a £20 million per season head start over the rest of us.” He added, “The lack of parity in the game certainly makes it harder to compete. This season there were nine clubs benefiting from parachute payments and there will be something similar next year. That gives them a massive financial advantage.”

If these parachute payments were to be excluded, the gap would obviously reduce, but Ipswich’s £16 million would still be a fair way behind many other clubs, e.g. Brighton £25 million, Leeds United £24 million and Derby County £21 million. Given these stats, Ipswich’s performance in the last three seasons is worthy of some praise.

The mix of Ipswich’s revenue has changed over the years with broadcasting rising from 13% in 2009 to 33% in 2016 and commercial falling from 41% to 27%. However, match day remains the most important revenue stream at 40%, even though it has declined from 46%.

Unsurprisingly, this means that Ipswich are one of the Championship clubs most reliant on gate receipts. In percentage terms only four clubs had a higher dependency in 2014/15: Nottingham Forest, Charlton Athletic, Brighton and Millwall.

Gate receipts were flat at £6.5 million in 2015/16, even though average attendance fell by 644 (3%), as this was offset by one additional home cup game. Nevertheless, Ipswich’s match day revenue is the 9th highest in the Championship, though still around £3 million lower than Brighton £9.4 million and Leeds United £9.2 million.

Ipswich’s average attendance of 18,959 was actually the 8th best in last season’s Championship, but a fair way behind clubs like Derby County (29,663), Brighton (25,583) and Middlesbrough (24,627).

Ipswich’s attendances had been on a declining trend for a number of years, but the charge to the play-offs resulted in an upswing in 2014/15. However, they have started to fall again since then with a further slump this season to 16,789, which means that Ipswich have lost a third of their crowd since the recent 25,651 peak in 2004/05.

Evans is acutely aware of the reduction in spectators: “We can’t deny that attendances have been falling away somewhat this season – an indication of the disappointing results we have had this year.”

He said that the club was “looking at creative ways of getting supporters back to Portman Road.” These include low prices for youngsters (e.g. the season ticket for under-11s has been held at just £10 for nine successive years), interest-free direct debit monthly payment scheme and discounts with local businesses. If Ipswich are promoted to the Premier League, the season ticket will be upgraded at no extra price plus the holder will be given a free season ticket.

However, fundamentally Ipswich’s ticket prices are among the most expensive in the second tier. According to the BBC’s Price of Football survey, no other fans in the Championship pay more for the most expensive season ticket, while Town’s prices for the cheapest season ticket are only surpassed by three clubs (Brighton, Newcastle and Norwich City).

From 2003 to 2013 season ticket prices had remained frozen for seven out of the 11 years. However, prices have gone up every year since 2014/15, including a 1.5% increase for the 2017/18 season (in line with the retail price index).

Ipswich’s broadcasting revenue rose 6% (£0.3 million) to £5.4 million in 2015/16, which was attributed to an increase in the Football League basic distribution. In the Championship most clubs receive the same annual sum for TV, regardless of where they finish in the league, amounting to around £4 million of central distributions: £2.1 million from the Football League pool and a £2.3 million solidarity payment from the Premier League. There are also payments for each live TV game: £100,000 home; £10,000 away.

However, the clear importance of parachute payments is once again highlighted in this revenue stream, greatly influencing the top nine earners in 2014/15. Nevertheless, it should be noted that these payments are not necessarily a panacea, e.g. Middlesbrough secured promotion last season, even though their broadcasting income of £6 million was less than half the size of those clubs boosted by parachutes.

Looking at the television distributions in the top flight, the massive financial chasm between England’s top two leagues becomes evident with Premier League clubs receiving between £67 million and £101 million in 2015/16, compared to the £4 million in the Championship. In other words, it would take a Championship club more than 15 years to earn the same amount as the bottom placed club in the Premier League.

The size of the prize goes a long way towards explaining the loss-making behaviour of many Championship clubs. This is even more the case with the new TV deal that started in 2016/17, which will be worth an additional £35-60 million a year to each club depending on where they finish in the table.

Even if a club were to finish last in their first season in the top flight and go straight back down, their TV revenue would increase by an amazing £95 million. They would also receive a further £71 million in parachute payments, giving additional funds of around £166 million. If they survived another season, you could throw in another £120 million.

Of course, if they did go up, Ipswich would also have to spend more to strengthen their playing squad, but the net impact on the club’s finances would undoubtedly be positive, as evidenced by the improvement in the bottom line for those clubs promoted in the past few seasons.

As we have seen, parachute payments make a significant difference to a club’s revenue and therefore its spending power in the Championship. From this season, these will be even higher, though clubs will only receive parachute payments for three seasons after relegation. My estimate is £83 million, based on the percentages advised by the Premier League (year 1 – 55%, year 2 – 45% and year 3 – 20%), including around £40 million in the first year. However, if a club is relegated after only one season in the Premier League, it will only benefit from parachute payments for two years.

There are some arguments in favour of these payments, namely that it encourages clubs promoted to the Premier League to invest to compete, safe in the knowledge that if the worst happens and they do end up relegated at the end of the season, then there is a safety net. However, they do undoubtedly create a significant revenue disadvantage in the Championship for clubs like Ipswich, as Evans has often stated.

It is worth noting that if Ipswich were to be promoted, then they are contractually bound to make additional payments to players, coaches, staff, players’ former clubs, season ticket holders and certain convertible loan note holders. This is not quantified in the latest accounts, but was given as £8.2 million in 2013.

Commercial income fell by 4% (£0.4 million) to £4.4 million in 2015/16, though this is a little misleading, as the match day public catering operation was outsourced whereby the club now receives a royalty based on turnover.

Corporate sales and sponsorship were also slightly down on last year, however merchandise sales exceeded 2014/15, further building on the success of the change of kit supplier to Adidas in 2014 (a four-year deal). This was the first time Ipswich had worked with the German supplier since the glory days 35 years ago when they won the FA Cup and UEFA Cup under Bobby Robson.

The shirt sponsorship is with the Marcus Evans Group, who originally signed a five-year deal in 2008 worth a reported £4 million in total and have subsequently extended this each season.

There is clearly room for improvement in the commercial area, though to be fair only two Championship clubs (QPR and Leeds United) generate more than £10 million a season. This is basically down to results, as Evans admitted: “We work very hard maximising revenues for the club on a commercial basis, but ultimately our product is about what the team delivers on the pitch. And, like any business, if your product is of good quality, you’ll make more money and sell more of your product.”

Ipswich’s wage bill increased by 4% (£0.6 million) to £16.6 million, as full-time headcount was up from 142 to 149, leading to the wages to turnover ratio rising from 97% to 102%.

This was the second year in a row that wages have climbed, a necessary evil for Town, as explained by Ian Milne when commenting on the 2014/15 figures: “The wage bill has gone up this season quite appreciably. People say ‘where has the Tyrone Mings and Aaron Cresswell money gone?’ Well that’s where it is being ploughed into.”

Nevertheless, wages are still 8% below the £18.0 million peak in 2012, when the wages to turnover ratio was as high as 119%. Milne again: “We’re not paying under the market value, but the important thing is that we’re not paying over the market value either – which is something we have done in the past. Back in 2012 (when the club made a loss of £16m) we were paying some very high salaries.”

Clearly, the business model is still not ideal if revenue is not sufficient to cover the wage bill, let alone any other expenses, but almost every club in the Championship has a dreadful wages to turnover ratio with over half of them being more than 100%. In fact, Ipswich’s 102% looks positively reasonable compared to clubs like Brentford 178%, Nottingham Forest 170% and Blackburn Rovers 134%.

The £17 million wage bill was also firmly in the bottom half of the league, underlining the challenge in reaching the play-offs. In particular, it was significantly lower than the likes of Cardiff City, Fulham, Reading, Hull City, Blackburn Rovers and Nottingham Forest, whose wages were all above £30 million. This season it will be even worse with the arrival of big spending Newcastle United and Aston Villa in the Championship.

As Milne observed, “We certainly aren’t the highest spenders in terms of wages. We are paying more than we were, but I suspect it is still quite a bit less than some of the clubs that surround us.”

Of course, a high wage bill is no guarantee of success and it is also true that clubs have been promoted with a low wage bill, e.g. Burnley, but Ipswich’s relatively low wages certainly do not make it any easier.

Other expenses rose by £0.3 million (6%) to £5.4 million in 2015/16, largely as a result of a restatement of the Football League pension fund deficit (in accordance with Financial Reporting Standard FRS102) and general cost increases, but this was still on the low side, compared to clubs like Brighton £16.0 million, Fulham £13.4 million and Leeds United £12.6 million.

The recent lack of spending in the transfer market has been reflected in Ipswich’s profit and loss account via player amortisation, which has fallen from £5.1 million in 2009/10 to just £0.2 million in 2015/16.

In the same way, the lack of big money buys from other clubs has impacted the balance sheet with the value of player (intangible) assets decreasing from £6.4 million in 2010 to £0.3 million in 2016.

The accounting for player trading is fairly technical, but it is important to grasp how it works to really understand a football club’s accounts. The fundamental point is that when a club purchases a player the transfer fee is not fully expensed in the year of purchase, but the cost is written-off evenly over the length of the player’s contract, e.g. Grant Ward was bought from Tottenham for a reported £600,00 on a three-year deal, so the annual amortisation in the accounts for him is £200,000.

To place this into perspective, Ipswich’s player amortisation of £0.2 million is one of the lowest in the Championship, only ahead of Rotherham United. The highest player amortisation is obviously found at clubs recently relegated from the Premier League, namely Hull City £21 million, QPR £16 million, Cardiff City £11 million and Fulham £11 million.

Net debt fell by £0.7 million from £87.2 million to £86.5 million, as gross debt was reduced by £1.6 million from £88.2 million to £86.6 million, but cash also dropped by £0.9 million from £1.0 million to £0.1 million. Nevertheless, debt has shot up from the £36 million in 2008, which was largely taken on by Evans when he bought the club.

Almost all the debt is owed to various Marcus Evans’ companies, mainly through a mixture of loans and convertible loan notes. There are also £8 million of preference shares, which pay a fixed dividend of 7% per annum (provided there are profits available for distribution). To date, the club has accrued £4.8 million for these dividends. Against that, interest has not been charged on the Loan Notes 2026 from July 2014.

Of course, many clubs in the Championship have built up substantial debt, but Ipswich’s £87 million is only surpassed by five other clubs: QPR £194 million, Brighton £171 million, Cardiff City £116 million, Blackburn Rovers £104 million and Hull City £101 million.

The club has emphasised that it is not in debt to any financial institution, as explained by finance director Mark Andrews, “''Most Championship clubs are carrying debt but the majority of debt carried at Ipswich Town is not external, it is owed to the Marcus Evans Group.”

Milne added, “Marcus is very happy with the debt level – it’s all owed to him, none of it is owed to banks or anything like that. He, like a number of owners, doesn’t expect to get any of it back unless we get in the Premier League.”

This is indeed true, but there is still a degree of risk associated with such an arrangement, as the annual accounts noted: “the club remains dependent upon ongoing financial support from its principal shareholder.”

From a cash perspective Ipswich basically balance the books, but only because Evans increases his loan each year, as the cash flow from operating activities remains stubbornly negative. In the last decade Evans has provided £46.3 million via £32.8 million of loans and a £13.5 million increase in share capital. Financing has also come from £7.4 million of net player sales and a £1.5 million reduction in the cash balance.

However, the lack of investment over the last eight years is striking with just £0.2 million being spent on infrastructure improvements in the Evans era, i.e. virtually nothing on the stadium. Instead, almost all of the funding has been used to simply cover the club’s operating losses.

Former chief executive Simon Clegg explained Ipswich’s dependency on the owner a few years ago, “We only survive because Marcus Evans can afford to put in £4 million or £5 million of his own money every year to keep the club afloat”, while Evans repeated the mantra last December, “I am committing sums of £5 million and more per annum, at the start of each season towards the annual budget.”

That was certainly true in the past, but the cash flow statement shows that only around £400,000 of additional loans were received by the club in each of the last two seasons (net £250,000 after loan repayments), as the difference was largely compensated by player sales.

That may have changed this season, but Milne noted in a slightly worrying statement that, “You can’t keep expecting the owner to keep throwing money at things.”

Either way, Ipswich’s cash balance as at 30 June 2016 was down to just £91,000, one of the lowest in the Championship, though in fairness none of the clubs is sitting on a cash mountain.

One accusation against Evans’ ownership is that there has been a lack of transparency around the club’s affairs, epitomised by HMRC issuing a winding-up order in February 2016 for non-payment of tax, though this was subsequently dismissed – and described by Milne as “a storm in a tea cup”.

Yet the main charge is that the owner lacks ambition. The man himself has argued that this is not the case, effectively laying the blame at the feet of Lady Luck: “When I took over here I was hoping we would get to the Premier League in five years. I never had a firm expectation though. I realised that in football there are so many factors outside of your control.”

In fairness, Evans’ cautious approach has to be considered preferable to that applied by some owners (Bolton Wanderers, for example), especially for a club like Ipswich Town that experienced administration in the not too distant past.

"Hard to Berra"

In any case, he cannot simply buy success, as Ipswich need to comply with the Financial Fair Play (FFP) regulations. Evans had been a keen supporter of this initiative, “It is a key objective of the Board to reduce ongoing losses in order to meet the Football League’s FFP rules.”

However, he has become increasingly disillusioned, “FFP, which was brought in to level an increasingly uneven playing field hasn’t worked.” This is not just due to the advantage that parachute payments bring to clubs facing a cap on losses, but the application of the regulations.

Evans again, “At the moment it appears to be a total farce. However, let’s wait and see if the Football League does its job. I appreciate that legal wheels sometimes grind very slowly.”

Under the new rules, losses will be calculated over a rolling three-year period up to a maximum of £39 million, i.e. an annual average of £13 million, assuming that any losses in excess of £5 million are covered by owners injecting equity. A higher loss one year can be compensated in later years, e.g. via player sales, or might even become irrelevant (if the club is promoted).

"No Tears for Sears"

Basically, the allowable losses have increased, which is likely to encourage Ipswich’s rivals to spend even more, making the division even more competitive. For Ipswich to challenge, Evans would have to inject equity to maximise allowable losses.

It should be noted that FFP losses are not the same as the published accounts, as clubs are permitted to exclude some costs, such as depreciation, youth development, community schemes and any promotion-related bonuses.

These barriers help explain Ipswich’s focus on youth development, as explained by Evans: “I am 100% committed to the Academy and have recently invested over £1 million in new infrastructure and additional staffing. I believe our efforts of the last years are starting to pay off.”

Despite failing to secure the coveted Category One status, a number of talented players have emerged from the Academy over the last couple of years, e.g. Andre Dozzell, Teddy Bishop, Josh Emmanuel and Myles Kenlock. Furthermore, Town had three players in the England squad at last summer’s U17 European Championship.

"Teddy Picker"

Evans recently underlined his commitment, to Ipswich Town “I will continue to do everything I can to ensure that the success we want is just around the corner and that we are promoted.” However, he put his finger on the main issue in the very same statement, “There are those that feel my investment plan has no chance of success.”

This is a reference to the feeling that it is unlikely that a club like Ipswich could be promoted to the Premier League without the benefit of substantial investment, particularly in a world of ever more lucrative parachute payments to clubs relegated from the top flight.

It would indeed be a major surprise if Ipswich were to go up, especially given their current lowly position. Stranger things have happened, but not too often.

Monday, January 16, 2017

Everton - Pressure Drop

Although Everton reached two domestic cup semi-finals in 2015/16 (something the club had not done since 1984), their performances were disappointing in the Premier League, as they finished 11th for the second successive season. As chairman Bill Kenwright observed, “Ultimately, our final league positions over the last two seasons were not good enough.”

This culminated in the decision to sack manager Roberto Martinez, replacing him with former Dutch international Ronald Koeman, who was tempted to leave Southampton for the project at Everton.

This was a clear statement of intent by new majority owner, Farhad Moshiri, an Iranian billionaire, who bought a 49.9% stake in the club for a reported £85 million in February 2016 after selling his Arsenal shareholding to business partner Alisher Usmanov.

Moshiri explained his managerial choice thus, “For our club to compete in the north-west of England, which is the new Hollywood of football with Guardiola, Mourinho, Klopp, we needed a star to stand on the touchline, so I got Koeman.”

The club also brought in a new director of football in the shape of Steve Walsh, who had been responsible for some astute player recruitment at surprise champions Leicester City by scouting the likes of Riyad Mahrez, N’Golo Kanté and Jamie Vardy.

"Rom, if you want to"

Everton had been looking to secure new investment for many years, but Kenwright is convinced that he has found the perfect investor: “I’m more positive now about the future of our great club than I’ve been during my time as Chairman. I have absolutely no doubt that in Farhad Moshiri we have found someone not only with the wherewithal - and we all know how important that is these days - but also with a deep understanding of the game and a growing appreciation of all things Everton.”

This new investment is key to Everton’s future prospects and should represent a substantial change after years of caution and thrift. Certainly, Moshiri is talking a good match: “The way to compete is to build a big stadium, to increase our merchandising and commercial income. That is what we will do.”

He added, “We needed a strong balance sheet, so I paid off the debts. We are now very flexible financially. We have no restrictions to spend.”

Before his departure, the ebullient Martinez said, “financially we can compete against anyone in world football”, which seemed a bit over-the-top, but for the first time in ages Everton do appear to have a solid plan. As part of the new strategy, Moshiri will clearly make funds available to strengthen the squad, which will give the Blues a fighting chance on the pitch.

The need for new investment was highlighted by the publication of Everton’s financial results for the 2015/16 season, which included a hefty loss of £24.3 million, considerably higher than the previous season’s £4.6 million, though the bottom line was adversely impacted by a significant  £11.3 million exceptional payment “to former employees and other costs in relation to the change in coaching staff in the year”.

 This obviously included paying out the remainder of Martinez’s contract. It is not clear whether the reported £5 million compensation paid to Southampton to secure Koeman’s services is also included, but my guess would be that will only be reflected in next year’s figures, given that the Dutchman signed his Everton contract on 14 June, i.e. after the 2015/16 accounts were closed. Furthermore, Martinez’s pay-off was reported in the media to be in the region of £10-12 million.

Revenue fell £4 million (3%) to £121.5 million from a record £125.6 million in 2014/15, when Everton reached the last 16 in the Europa League. This contributed to commercial income decreasing by £4.6 million (18%) to £21.4 million, as the club “missed out on performance bonuses from its partners and commercial revenues from UEFA.”

"Have I told you, Leighton?"

The absence of European football also meant that gate receipts were £0.3 million (2%) lower, though this was largely offset by reaching the semi-finals of the FA Cup and Capital One Cup. Broadcasting income was slightly higher at £82.5 million, due to Everton being shown live one more time.

Costs continued to grow with the wage bill rising £6.5 million (8%) to £84 million and player amortisation up £3.3 million (17%) to £22.4 million. Other expenses also increased by £1.5 million to £30.4 million.

In contrast, profit on player sales rose £4.5 million to £7.8 million, while net interest payable was £2.7 million lower at £3.7 million. It should be noted that the 2014/15 interest was restated following the transition to Financial Reporting Standard 102.

These financials were noting to write home about, as confirmed by chief executive Robert Elstone, “The results reflect a challenging year for the club. Performance on the pitch directly impacted commercial income with key deals reduced as a result of the club’s finishing position.”

Traditionally, football clubs have lost money, but the environment has largely changed in the Premier League these days, thanks to the combination of surging TV money and Financial Fair Play regulations, which has meant that top-flight English clubs have never been richer.

In fact, Everton are one of only two clubs that have so far published 2015/16 accounts that have reported a loss. The other one is Chelsea, and they would also have been profitable without £75 million of exceptional payments (mainly the termination fee for their shirt sponsorship deal).

At the other end of the spectrum, we find the two Manchester clubs with United and City announcing healthy pre-tax profits of £49 million and £20 million respectively. The other Premier League clubs that have released 2015/16 accounts to date were also profitable: Norwich City £13 million, Arsenal £3 million and Stoke City £2 million.

This continues the trend of the 2014/15 season, when only six of the 20 Premier League clubs made losses. This group largely comprised clubs that have been badly run (Aston Villa, Sunderland and QPR), but also included Chelsea, Manchester United and, yes, Everton.

In fairness, one of the drivers for Everton’s poor financial performance has been the lack of profits from player sales. This activity can have a major influence on a football club’s bottom line, as shown in 2014/15 by Liverpool (£56 million) and in 2015/16 by Chelsea (£49 million).

In contrast, Everton only generated £8 million of profit from this activity, mainly due to the transfer of Steven Naismith To Norwich City, though this was higher than the £3 million reported in 2014/15.

Of course, Everton have more often than not lost money, reporting losses in eight of the last 11 years. They were consistently loss-making between 2006 and 2012 (with a cumulative £45 million loss in those seven years), though they did at least restrict their annual losses to manageable levels. There was then some improvement in 2013 and 2014 before a return to losses in 2015 and 2016.

As we have seen, this is partly due to the declining impact of player sales in the last two seasons. Indeed, the £28 million profit in 2014 was almost entirely down to the sale of Marouane Fellaini to Manchester United. It is fair to say that in many years Everton have effectively subsidised their underlying deficit with the sale of a major player, despite Kenwright claiming that Everton are “not a selling club.”

Over the last decade, Everton’s aggregate loss before tax was £33 million, but this would have been significantly worse without £113 million of profits from player sales in the same period.

Next year’s accounts will benefit from the £47.5 million sale of defender John Stones to Manchester City, which will help Everton swing back into the black (along with the additional money from the new TV deal).

The club has noted that the balance sheet “substantially undervalues” players such as Romelu Lukaku and Ross Barkley, especially as no cost is ascribed to home grown players. Of course, Everton would almost certainly want to retain such talent, but they would boost their profits if they were to sell.

To get an idea of underlying profitability and how much cash is generated, football clubs often look at EBITDA (Earnings Before Interest, Depreciation and Amortisation), as this metric strips out player trading and non-cash items.

In Everton’s case this highlights their operational difficulties in the past two seasons, as their EBITDA has fallen from £25 million in 2013/14 to just £7 million in 2015/16 (excluding exceptional payments). The major improvement in 2014, following many seasons of cash break-even, was largely due to the first year of that Premier League TV deal three-year cycle, so we could anticipate a similar jump in 2016/17 with the new TV deal – at least £9 million based on the operating profit projection at Everton’s AGM.

This is much-needed if we look at EBITDA in the Premier League, which shows that Everton are a long way behind the elite with Manchester United leading the way with an astonishing £192 million, followed by Manchester City £109 million and Arsenal £82 million. In other words, United’s cash profit is an incredible 27 times as much as Everton’s.

The only Premier League clubs with lower EBITDA than Everton were Stoke City, Sunderland, Swansea City and Aston Villa, which is a shocking state of affairs for a club of Everton’s history. No wonder that Moshiri has been welcomed with open arms, as he will definitely grow the club’s revenue.

Everton made great play of the fact that 2015/16 was the “third successive year we posted turnover in excess of £120 million.” That’s one way of looking at it, but another less charitable view would be that revenue has essentially been flat for the last three seasons.

Since 2013 revenue has grown by £35 million (41%), though most of this is down to the increasing TV deal (£27 million), which is thanks to the central Premier League negotiating team, as opposed to the club’s board. In fairness, commercial revenue has grown by £8 million in this period, while gate receipts were unchanged at just under £18 million (though this is a bit misleading, as it does not take into consideration the club’s restatement of the revenue categories in 2014).

At the recent AGM Everton projected revenue of £172.5 million in 2016/17, a year-on-year increase of £51 million, almost all of which is driven by the new Premier League broadcast deal. The club’s challenge has been to differentiate itself from other clubs by growing commercial income. Although they have been unsuccessful in the past, Moshiri will surely change that for the better.

The importance of revenue growth is clear when we compare Everton’s £122 million to the Premier League elite, e.g. Manchester United earned more than half a billion, which is almost £400 million higher than the Blues. That’s an enormous financial advantage – every season.

In fact, the top four clubs all earn well above £300 million: United £515 million, Manchester City £392 million, Arsenal £351 million and Chelsea £329 million, while Liverpool and Tottenham generated £298 million and £196 million respectively in 2014/15. Little wonder that Moshiri referred to “a mini league emerging this year of six clubs”

Although it could be argued that Everton are not doing too badly in revenue terms, as they are the 8th highest in the Premier League, there is a distinct bunching of clubs in the £100-120 million range. In other words, Everton’s financial advantage over the other clubs is nowhere near as much as their disadvantage compared to the top six.

Moshiri acknowledged this when speaking about Koeman’s objectives: “He achieved eighth and seventh with Southampton. He needs to improve on that, but it is a very difficult landscape now.”

One point worth noting is that Everton’s revenue would be around £8 million higher if the gross revenue from the outsourced catering and kit deals were to be added back.

On the bright side, Everton had the 18th highest revenue in the world in 2014/15, which represented the club’s joint highest position in the Deloitte Money League. That’s obviously a fine accomplishment, but it does not really help Everton much domestically, as no fewer than 17 Premier League clubs feature in the top 30 clubs worldwide by revenue.

As Deloitte observed, “This is again testament to the phenomenal broadcast success of the English Premier League and the relative equality of its distributions, giving its non-Champions League clubs particularly a considerable advantage internationally.”

One technical aside: Everton include the commercial elements of TV deals within commercial income, even though most other clubs classify it as broadcasting income, and Deloitte have duly reduced commercial and increased broadcasting (though the total revenue is the same).

All these reclassifications make it difficult to analyse Everton’s revenue mix, but a couple of things are clear. First, match day has become progressively less important with only 15% of total revenue coming from this stream. Second, like so many Premier League clubs, there is huge reliance on TV money, which generates just under 70% of their turnover.

That might sound a little concerning, but it is fairly common business model in the Premier League. For example, in 2014/15 nine clubs actually had a greater reliance on TV money than Everton, with three of them (Burnley, Swansea City and WBA) earning 80-85% from broadcasting. This dependency will further increase with the blockbuster 2016/17 deal.

In 2015/16 Everton’s share of the Premier League TV money rose 3% (£2 million) from £81 million to £83 million, due to being broadcast live on one more occasion (18 vs. 17). The distribution of these funds is based on a fairly equitable methodology with the top club (Arsenal) receiving £101 million, while the bottom club (Aston Villa) got £67 million.

Most of the money is allocated equally to each club, which means 50% of the domestic rights (£21.9 million in 2015/16) and 100% of the overseas rights (£29.4 million). Merit payments (25% of domestic rights) are worth £1.2 million per place in the league table and facility fees (25% of domestic rights) depend on how many times each club is broadcast live.

There was also £4.5 million of commercial revenue awarded to all Premier League clubs, though I suspect that Everton might have reported this within commercial income, even though most other clubs classify it as broadcasting income. This would help explain why Everton’s total broadcasting income in the accounts was only £82.5 million, even though their Premier League distribution was £83.0 million.

"The Liberty of Mason Holgate"

Either way, Elstone was right to draw attention to the new TV deal stating in 2016/17: “We are also benefiting from the increased revenues under the significant new broadcast deal” The AGM projected an increase in broadcasting income to more than £130 million, based on 55% growth in the Premier League deal (70% domestic and 40% overseas). The importance of success on the pitch was also emphasised, as each league place under the new deal would be worth an additional £1.9 million, compared to £1.2 million for the previous deal.

Former Everton manager Roberto Martinez welcomed the new TV deal, as he believed that it would give the middle-tier clubs greater chance of success: “The new television contract has given an opportunity to every club to do something different. They can look at themselves, thinking this is the first time that we have been able to spend a certain amount of money, and suddenly you develop a belief that allows you to be competitive.”

Another way of looking at this is that Everton earned more from broadcasting in 2014/15 than Bayern Munich, Borussia Dortmund, Atletico Madrid, Roma, Milan and Paris Saint-Germain – even before the £45-50 million increase in 2016/17.

Everton have only qualified once for Europe in recent years, earning €7.5 million from the Europa League in 2014/15. This was a lot less than the €20.9 million that Tottenham received for reaching the same stage the following season.

Not only did the new UEFA television deal deliver 38% more money in 2015/16, but a greater proportion was allocated to the Europa League, so that prize money for this competition shot up by 71% (even though the rewards are still much higher in the Champions League).

Regular qualification for Europe would be highly beneficial for Everton, as can be seen by the money earned by English clubs over the last season. Chelsea lead the way with €253 million, largely thanks to their Champions League triumph in 2012, but maybe a better comparative would be Liverpool, who earned €77 million in this period, i.e. €69 million more than Everton.

This only relates to the broadcasting income, but additional revenue would also come from more gate receipts and higher commercial income via success clauses in commercial deals.

Everton’s gate receipts fell by £0.3 million (2%) from £17.9 million to £17.6 million in 2015/16, largely due to the absence of European competition, though the impact of this lost revenue was reduced by increased revenue form reaching the semi-final of both domestic cup competitions compared to third round exits in 2014/15.

The average attendance fell slightly to 38,132, though this was only the second time in 20 years that consecutive seasons posted averages above 38,000. Moreover, this season attendances have rebounded above 39,000, which would be the highest attendance since 2003/04.

Elstone commented, “We’re delighted to be projecting an average gate in excess of 39,000. We look set to be full for every game in 2016/17. Of course, the reason we’re full is almost 32,000 season ticket holders.”

This is partly due to Everton’s admirable commitment to affordable pricing. The club froze ticket prices in 2015/16, while they actually reduced all season ticket prices by 5% for the 2016/17 season, representing a free game compared to the previous season.

They have continued this trend by announcing that all season ticket prices will be reduced or frozen for the 2017/18 season and have introduced a 12-month payment option. The maximum season ticket price is £565, ensuring that no adult will pay more than £30 a game. There is also a new £380 season ticket for 22-24 year olds, so youngsters will only pay £20 a game.

Elstone explained the club’s philosophy: “We feel confident that our current pricing structure represents great value for money and holds up well when compared to our rivals. Most importantly, it makes football at Goodison affordable for young fans.”

As a result of these pricing initiatives, Everton’s match day revenue of £18 million will continue to lag behind the top six clubs: Manchester United £107 million, Arsenal £100 million, Chelsea £70 million, Liverpool £59 million, Manchester City £53 million and Tottenham £41 million.

Elstone confirmed the impact on the financials, “The outcome of this affordable pricing strategy is a significant drop in what we generate from each seat for each game”. However, he added, “We were conscious of the substantial uplift in the value of our media rights next season.”

"Working for the Yannick Dollar"

Of course, a new stadium would be a game changer for Everton. It would be a wrench to leave Goodison Park, one of the most atmospheric grounds in England, but it is simply not fit-for-purpose in the modern era with its limited capacity and inadequate facilities.

As Moshiri said, the club needs a new stadium that “rewards the loyalty and passion of our fans.” He continued, “We need a big stadium, no question about it. We have done the hard bit, because the club was restricted to move or expand Goodison by banking covenants, but I have paid the debts, so we are free to do what we want and we have the finances to do it.”

There have been a few false dawns with three other proposed stadium moves coming to nothing: first King’s Dock in 2003, then “Destination Kirkby” in 2009, most recently Walton Hall. However, it now feels like it could really happen.

"Enola Gueye"

There are two potential sites: Bramley Moore Dock and Stonebridge Cross in Croxteth. The dock site is clearly the club’s preferred option, as confirmed by Mayor Joe Anderson at Everton’s AGM, “Everybody in this room wants the waterfront site. This is the most exciting opportunity this club has had in decades.”

Elstone also favoured this site, though he did sound a note of caution: “The opportunities are much greater at that site, but so are the costs. We have to find answers to some of the uncertainties and risks, because it is the biggest decision the club will ever make.”

He continued, “(There has been) solid progress on many fronts, most encouragingly in our partnership with Liverpool City Council and its desire to support our efforts to find the money to make the stadium viable. We are optimistic about the new stadium prospects. It’s an optimism tempered by some significant issues that need to be resolved before we can move forward.”

The final word (for now) on the new stadium goes to Moshiri, which is fair enough, as he may well end up funding most of the required £350 million plus: “In our mind, we know where we want to go. We are committed.”

Everton’s reported commercial income dropped 18% (£4.6 million) from £26.0 million to £21.4 million in 2015/16, comprising £9.3 million for sponsorship, advertising and merchandising plus £12.1 million for other commercial activities. The fall was due to the absence of commercial revenue from the Europa League.

As we saw earlier, it is not completely clear what the club has included within commercial income and the Deloitte like-for-like figure for 2014/15 was adjusted downwards to £20.1 million, as they excluded the “commercial” element of broadcasting income. This meant that Everton had the lowest commercial revenue of any club in the Money League Top 20.

That said, the comparisons are a bit misleading, as Everton have outsourced their catering and kit deals. If they were to report these revenues gross (like most other clubs), their commercial income would rise by £8 million.

"Don't cry for me, Argentina"

Whatever it consists of, Everton’s commercial income of £21 million pales into insignificance compared to heavyweights such as Manchester United, who generate an amazing £268 million from this activity. That comparison might be a little unfair, but it is worth noting that Tottenham earned £60 million (in the 2014/15 season).

It is clear that Everton need to address their commercial shortcomings, as Elstone acknowledged, “We will continue to look for growth in all areas, in particular, as we approach the mid-point of the final year of the current Chang partnership, with a clear focus on our main sponsor opportunity.”

It is therefore very encouraging (“great news” per Elstone) that the club has “signed up £75 million in new revenues” in the past few weeks. The chief executive noted that the two deals already finalised will run over a five-year period, implying £15 million a year.

Elstone spoke of “a 300% increase in the value of our shirt sponsors”, which would suggest that the new deal would be worth £21.2 million a year, given that the current deal with Thai beer producer Chang is worth £5.3 million a year (£16 million over three years).

That would represent a notable increase, but there have been some suggestions that Elstone’s comments could have been misconstrued, e.g. if the 300% increase referred to the total value of the deal, that would imply £64 million over five years, meaning an annual value of £12.8 million. My guess is that the increase refers to the combined value of the front of shirt and additional sleeve sponsorship, but we should soon know.

Either way, it’s solid progress on the commercial front with talk of Kenyan online sports betting firm SportPesa being the new shirt sponsor. One possibility for a more lucrative deal would be to give the new partner first refusal on stadium naming rights.

Encouraging stuff, but to place this into perspective, the leading clubs have secured much higher shirt deals: Manchester United (Chevrolet) £56 million, Chelsea (Yokahama) £40 million, Arsenal (Emirates) £30 million, Liverpool (Standard Chartered) £25 million.

The club has also announced a significant new sponsorship deal for the Finch Farm training ground and academy. This is with USM Holdings, the holding company of Alisher Usmanov, Moshiri’s business partner. The fact that Usmanov is helping out his mate has raised some eyebrows, as the Russian remains an Arsenal shareholder, and it is likely that the deal would be reviewed for “fair value” by UEFA (assuming it is deemed a “related party” transaction) if Everton qualify for Europe.

Everton’s kit supplier deal with Umbro was described as a club record and is reportedly worth £6 million a season, which would be twice as much as the previous Nike contract, though the accounts suggest that it might not be so high in reality.

This is again a long way behind the deals at other clubs, e.g. Manchester United (Adidas) £75 million, Chelsea (Nike) £60 million, Arsenal (Puma) £30 million, Liverpool (New Balance) £28 million.

It will also be interesting to see if Moshiri reviews the 10-year Kitbag deal, which provides a guaranteed £3 million a year plus royalties for running the retail operation. Elstone has described this as a good arrangement that “de-risks Everton in a notoriously difficult business sector”, but it does betray a lack of ambition.

Everton’s wage bill rose 8% (£6.5 million) to £84 million, following continued investment in the squad, with the additions of Tom Cleverley, Aaron Lennon, Ramiro Funes Mori, Gerard Deulofeu and Mason Holgate. In addition, new contracts were awarded to James McCarthy, Kevin Mirallas, Mo Besic, Brendan Galloway and Bryan Oviedo.

Furthermore, the average number of employees increased from 274 to 315, including playing, training and management up from 98 to 108, youth academy up from 38 to 47, marketing and media up from 32 to 41 and management and administration up from 71 to 81.

The wage growth increased the wages to turnover ratio from 62% to 69%. Elstone said that this was still “below the Premier League average”, which does not seem to be the case based on reported figures, though it is accurate if we add back the outsourced commercial revenue, which reduces Everton’s ratio to 65%.

Following last season’s growth Everton’s wage bill is essentially “best of the rest”, i.e. the highest of those clubs outside the top six. However, it is still dwarfed by the elite clubs: Manchester United £232 million, Chelsea £222 million, Manchester City £198 million and Arsenal £195 million.

This disparity was noted by Koeman: “We have a lot of ambition and we like to do the best that is possible. But you have to look to the big clubs with the possibilities and the players they have. Nobody expected Leicester to win last season, but that will not happen again.”

Clearly, Moshiri will try to increase the wage bill to better compete. Indeed, Elstone has already advised, “Projected wages are set to increase significantly in the current season, reflecting a further commitment to player recruitment and new contracts for existing players.” The AGM forecast a wage bill of £111 million for 2016/17, an increase of £27 million.

However, Everton will need to consider the Premier League’s Short Term Cost controls, which restrict the annual player wage cost increases to £7 million a year for the three years up to 2018/19 – except if funded by increases in revenue from sources other than Premier League broadcasting contracts, e.g. gate receipts, commercial income and profits on player sales.

One thing that is quite striking in Everton’s accounts is the growth in other operating costs, rising from £22 million to £30 million in the last three years without any substantial explanation.

This seems quite high for a club of Everton’s size, especially as the retail and catering businesses have been outsourced, which means that other operating costs should be lower than other clubs (as net profits are reported in revenue).

Another cost that can have a major impact on the profit and loss account is player amortisation, which reflects investment in transfers. Basically the more that a club spends, the higher its player amortisation. In this way, Everton’s player amortisation has doubled from just £11 million in 2013 to a £22 million peak in 2016, reflecting increased spending in the transfer market.

The accounting for player trading is fairly technical, but it is important to grasp how it works to really understand a football club’s accounts. The fundamental point is that when a club purchases a player the transfer fee is not fully expensed in the year of purchase, but the cost is written-off evenly over the length of the player’s contract, e.g. Romelu Lukaku was bought for a reported £28 million on a five-year deal, so the annual amortisation in the accounts for him is £5.6 million.

Nevertheless, Everton’s player amortisation of £22 million is not that high for the Premier League and is obviously miles behind the really big spenders like Manchester City (£94 million), Manchester United (£88 million) and Chelsea (£71 million), though it should further increase next year following this summer’s acquisitions.

For the period between 2009 and 2014, despite Kenwright’s protestations, Everton were a selling club, averaging annual net sales of £7 million. However, the last three seasons have seen a return to spending, with average net spend of £21 million, including the club’s record purchase of Lukaku from Chelsea.

Last summer Everton splashed out £45 million to bring in Yannick Bolasie, Ashley Williams, Idrissa Gueye and Maarten Stekelenburg, though they recouped the outlay in one fell swoop by selling John Stones to Manchester City. As Kenwright put it, “While we may not have finally done the amount of business in the summer transfer window we would have liked, we still added considerable strength and experience to our squad.”

Despite the higher spending over the last three seasons, Everton’s net spend is still mid-table in the Premier League, a long way below the two Manchester clubs (City £299 million and United £275 million), though it was higher than Liverpool £55 million.

However, Everton have been one of the most active clubs in the January transfer window, already purchasing midfielder Morgan Schneiderlin from Manchester United for a fee rising to £24 million and 19-year-old forward Ademola Lookman from Charlton for £11 million. They have also reportedly made offers for Standard Liege forward Ishak Belfodil and Atalanta midfielder Franck Kessié.

Everton’s net debt rose by £23.5 million from £31.3 million to £54.8 million with gross debt increasing by £17.6 million from £40.0 million to £57.6 million and cash falling by £5.9 million from £8.7 million to £2.8 million.

At the time of the accounts, the debt comprised three elements: (a) 25-year loan of £20 million with Prudential, which bears a high interest rate of 7.79%, leading to annual payments of £2.8 million; (b) a short-term loan of £35 million with Rights and Media Funds Limited (formerly JG Funding), securitised on Premier League TV money, at a 5.2% interest rate; (c) overdraft with Barclays of £2.7 million.

This is all irrelevant now, as Moshiri provided an interest-free loan of £80 million with no agreed repayment data after the account were published. This was used to repay all of the external loans and to pay the exceptional items.

Hopefully, this will bring to an end Everton’s use of opaque loans taken out with mysterious offshore corporations that started with Vibrac, who are based in the British Virgin Islands, though the accounts did note that the club had secured similar funding via a facility repayable on 14 July 2017.

Everton’s debt is by no means one of the highest in the Premier League with four clubs having debt above £100 million, namely Manchester United £490 million, Arsenal £233 million, Sunderland £141 million and Newcastle United £129 million.

Everton also have contingent liabilities of £35 million (£18 million dependent on future appearances and £17 million loyalty bonuses if certain players are still with the club on specific dates), up from £20 million the previous season.

The high interest rate on Everton’s loans has meant that their financing costs have been among the largest in the Premier League. Although nowhere near as much as the interest paid by the likes of Manchester United and Arsenal, this has certainly not helped the club’s finances. The good news is that Moshiri’s interest-free loan should save them around £5 million a season.

This unwelcome burden is emphasised even more when reviewing the cash flow over the last eight years. In that period, Everton generated £84 million of cash, mainly from operating activities £56 million, though this was supplemented by additional loans (net) £18 million and the sale of the old training ground £9 million.

Around 40% of this cash (£34 million) was required for interest payments, which was only £7 million lower than the £41 million (net) spent on players, leaving only £10 million on infrastructure investment.

Looking ahead, there is a sense of optimism around Everton’s future following Moshiri’s investment. Obviously money is no guarantee of success, but it does make it more likely.

There are still some issues with Moshiri pointing out that the club will be somewhat restricted by FFP: “It is not the same as when Chelsea and Manchester City began their projects, which was before Financial Fair Play.” It’s also still not clear whether the Iranian will ultimately become the outright owner of the club.

"Williams, it was really nothing"

However, at least the club now has stronger backing, whereas for the past few years Everton have struggled to compete due to a lack of financial resources. In the shape of Moshiri, they evidently have a man with a plan, including reduction of external debt, increased commercial income and, of course, a new stadium.

Let’s leave the last word to him: “Bill and previous managers kept the club close to the elite for many years, but now we need to look at a sustainable base to be among the elite. It takes time, but we are committed, that’s why we’re here.”

He added, “It’s not enough to say you are a special club – we don’t want to be a museum. We need to be competitive and to win.”
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