The curious case of Everton Football Club

 It’s been a difficult week for Evertonians, after a season that promised so much; we’ve seen a strong Christmas position in the top 4 and a great FA Cup opportunity disintegrate into nothing.  My wife detests football and can’t understand why I spend so much time and energy around the beautiful game.  Sometimes I have to wonder myself.

Everton Football Club to many outside of the UK is – ashamedly – relatively unknown.  In my professional career, I meet people from a breadth of different cultures and nationalities many of whom are sports fans, yet when it comes to the conversation of my big sporting love, I’ve lost count of the number of times I have had to explain who and where Everton Football Club are.  Yes, really.  And, it never ceases to amaze and disappoint me when Italians, Spaniards, and Germans (in particular) question me as to what division we play in. 

When I left Liverpool to study at the age of 18, Everton had just won their 5th and last FA Cup (maybe I should move back).  We had experienced a difficult decade following one of the club’s most successful periods during my informative footballing years in the mid-1980’s.  As a young boy educated by a Father who had watched and marveled at the School of Science teams of the halcyon days of the 1960’s, I simply assumed the FA Cup, League titles and European trophy that were collected by the all conquering teams of the mid-80’s was just the way it was.  Oh boy, what a wake up call my twenties and thirties have been!

Never a media darling, but one of the top four English league clubs, a founder member of the Football League in 1888, whose first league title followed shortly after in 1890/91 when playing at Anfield (Yes, Anfield.  Liverpool FC didn’t exist until a year later due to a falling out between Everton FC and the greedy landlord who tried to capitalise on the newly crowned Champions’ prize money by hiking up the stadium rent).  A rich trophy laden history followed as the club wrote itself into the history books time and time again, innovating as well as winning, and building one of the largest and most localised fan bases in the country.  So, where did it all go wrong?  Once known as the Mersey Millionaires and arguably THE biggest and most successful club in the country during that period, how did a club at the top of the English game in the mid 80’s see such a meteoric decline in fortunes over the next twenty years?

There are a number of answers to this question, especially in terms of what many Evertonians see as the route cause, but factors have continued to conspire against the club in the last two decades and despite David Moyes celebrating eleven years at the helm today, many – myself included – feel that the man dubbed “The Moyesiah” and credited with keeping Everton in the top division (the longest serving club in the top division by the way), should step aside.  However, it is the board and not the manager who must be blamed for Everton’s inability to re-establish themselves as a top club capable of competing regularly for trophies.  At 18 years, this is technically the clubs most barren spell without a trophy.  I say “technically” because Everton were champions in 1939 before the World War I and held the mantle until 1945 when the league resumed post war.  The club never won another trophy until once again clinching the league title in 1963.  Up until 1990, Everton were second only to bitter rivals Liverpool as the countries’ top team.  Only Arsenal and Manchester United have surpassed The Toffess during the Premiership years.  I slightly labour this point because with the dawn of the cash laden years of football has come a tendency for the media and football pundits alike to completely rewrite the football history books.

The current board acquired the shares of Everton Football Club in 1999 for £20 Million and lifelong Evertonian and Chairman, Bill Kenwright commented “If you are going to run a successful football club you need two qualities: you need to be realistic and you need a plan. I'm realistic and I have a plan."  Well Bill, we’re still waiting for the plan and as far as “realism” goes, I’ll come on to that in a minute.  At the time the board acquired Everton Football Club, there was no debt and a strong list of fixed assets on the balance sheet.

Today, the club may temporarily be in a healthier league position but its finances and balance sheet have literally been torn to shreds.  The one time Mersey Millionaires haven’t got a pot to piss in, and whilst Everton can’t rub two brass farthings together and add to the smallest squad in the top division, smaller clubs merrily splash the cash strengthening their healthy sized squads.  

That brings me to the point of realism.  This week, ex-Red Stan Collymore, focused on why Everton – such a big successful historic club – had not been bought during his evening show on Talk Sport.  It was suggested, following information provided by an “unknown source” at Everton, that board were seeking an amount close to £125 Million for the club.   

The obvious question being “how can the board realistically believe the club should be valued at £125 Million when Aston Villa was valued at c. £63 Million, Everton has run up debts to the tune of £44.2 Million, disposed of assets, and added liabilities to the balance sheet?”

If we look at the Corporate Finance of it, the numbers don’t immediately appear to stack up.  The latest P&L accounts show that Everton added -25.9% to the total debt between 2011 and 2012 due to a loss of £9.1 Million.  Although total turnover only reduced by -1.8%, commercial revenue dropped by -34% year-on-year, whereas Gate Receipts and Broadcasting revenue remained within a -4% 0% range.  Intangible assets, specifically an ageing playing staff, will naturally reduce year-on-year unless new assets (players) are brought in to offset the annual amortisation.  The change between 2011 and 2012 was -23%, which is quite substantial given there was no major net gain on transfer fees.  So, then, what is it the board believe warrants a 525% return on their initial investment, thirteen years on?  The only feasible story can be the new BSkyB money due to be paid to all Premier League clubs for 2013/14.  The bottom placed team is reportedly likely to earn an additional £60 M, more than Champions Manchester City received in prize money last season.  This will, as was reported on Stan Collymore’s show, “wipe out the debts of all the major premier league teams”. 

So, there is an up side to Everton’s plight.  Well, not quite, because if every team sees substantial new revenues, they all have the ability to invest and strengthen their squads, whereas Everton’s board will more likely be concentrating on solving the “millstone” around the clubs neck, as the board have allegedly described the Grand Old Lady, Goodison Park. 

Again, turning to Corporate Finance.  Let us assume that through the new Broadcasting windfall Everton is able to wipe out the debt and make an operating profit (EBIT) of say, £15 Million.   Valuing a company is and can be a very complex process and yield a number of different outcomes depending on the view taken.  However, a very simple back of the fag packet calculation that is sometimes applied is EBIT multiplied by a factor of 8, or a similar number.  Taking an EBIT of £15 Million for 2013 with no debt (but shrinking assets), this gives a figure of £120 Million.  However, a shrewd negotiator would look for a substantial discount off that value given the lack of fixed assets, and the revenue problems created by the Grand Old Lady.  Therefore, the board and Kenwright in particular may have arrived at what they believe is a sensible valuation based upon future cash flows, but many would view it as “unrealistic”.  So, Bill, if you are the greatest Evertonian out there, convince the board to be more realistic in their valuation, forgo the greed of a 525% return on investment, and drop the asking price to a sum that will see a “worthy” investor take over and start the work of re-establishing EFC as a force.  An investor with just a little business nowse will be able to work wonders on the commercial revenue almost immediately.  Nil Satis Nisi Optimum.

Modern Day Football

Where to start with a view on modern day football?  The game has never had so many fans, it has never been so widely accessible and global in appeal, the players have never been so fit & athletic, yet there is an endemic problem with the global game, one that the successors of Plato and Aristotle are grappling with among numerous European nations; an insatiable appetite for debt fuelled by greed.

As we know, the issue is not isolated to football, with greed fuelling the obscene actions and behaviours of institutions and individuals alike, creating an unsustainable bubble that will leave wreck and ruin for a long time to come.  However, this wreck and ruin – as highlighted by the recent case of Glasgow Rangers – is possibly no more prevalent than in the world of football.  The desire to entertain seems to know no bounds yet only the fans of a handful of English Premier League clubs know true entertainment these days.  I know, I’m an Evertonian and have been for thirty-five years.  I’ve been through tougher times than now watching my team, for the decade I had a season ticket and for three solid seasons of not missing a game home and away when I had significantly less disposable income.  But, those dark days of Walter Smith felt more of a duty to support a truly dreadful team through a bleak period of my clubs rich history, rather than any real notion that I would ever be entertained. 

So, does the average football fan – premier league or otherwise – go and pay the ever increasing prices in the hope of being entertained on the odd Saturday (substitute for any day of the week courtesy of Sky television) a season, or is it more about the same sense of duty I used to feel when circumstances allowed me to watch my team every week?  But it’s not as simple as that in today’s world of football.  We have a new breed of nouveau riche football fan, for whom it is ‘trendy’ to support a football team and fain an interest in the sport.  They happily scoff prawn sandwiches from the comfort of a corporate box, or happily recline in their armchair in front of a fifty-inch plasma screen, with little regard for Gerrards Olympic dives or Drogbas endless sulks, content with barely ever experiencing the real thing.  And, in part, it is the latter who have contributed to this change in the football landscape, to an era of excess and indulgence when ‘real entertainment’ is limited to only a few head to heads a season, or the Champions League, a cartel for Europe’s bourgeois clubs, who in typical Marxist fashion continue to acquire and circulate wealth whilst the remainder become increasingly up shit creek without the proverbial paddle.

According to a recent article in The Guardian, English Premier League clubs lost £361m last year, despite record income of £2.3bn, yet – as with the global debt crisis – we seem to be burying our heads in the sand, kicking the can down the street, believing the problem will disappear.  It won’t.  Clubs have record levels of barely manageable debt and can’t continue to operate their businesses at a loss.  “Where’s the fucking money Lebowski?”  UEFA voted in September 2009 to begin introducing Financial Fair Play, but critics believe – myself included – that this will fuel the coffers of Europe’s bourgeois clubs, who will see the larger share of television revenues and continue to benefit from modern day footballs worst invention.  Yes, the Champions League, where an average team finishing 4^th in the English Premier League can be crowned European Champions.  Forgive me, but shouldn’t the competition, named “Champions” League be true to its name and only be contested by the “Champions” of each country, just like in the good old days?  Just a notion that may create real ‘fair play’ within the respective leagues of each competing nation.

The expectation of fans of certain clubs who believe their club has a divine right to win trophies because of their history fuels part of the problem, as do the Oligarchs who have been merrily buying up premier league clubs and saddling them with debt underwritten by their own personal fortunes.  Modern day football has become a game of who’s got the biggest cock and, by only a millimetre, the Arabs have pipped the Americans and Russians for the most recent bragging rights. 

So, with all this investment and increased access to football, surely the fans are the real winners?  Not if footballers are being paid sums of money that are virtually bankrupting their clubs, whilst regularly serving up sub standard performances.  Hugo Rodallega, an average striker, reportedly wants £70,000 a week to join a new club.  This is what is bankrupting clubs and this era of player greed and excess has to stop.  Normal businesses do not pay wages to their employees that cannot be covered by their income, minus other costs and calculating for a profit.  Why do we, the football clubs themselves, and the players ignore this simple business fact?

Arsenal fans have recently been complaining of the clubs’ lack of ambition, having not won a trophy of any description for seven years, and – once again – certain to lose their best player.  Whilst I can sympathise, there are very few clubs these days that cannot be described as a “selling” club.  However, the critical difference with Arsenal is that a) they’ve had success during the Premier League years, and b) they have wealthy benefactors and have been turning in a profit, so their fans are more expectant.  Although, said profit is – sensibly – being used to reduce the debt from a large recent Capital Expenditure, the new stadium.  Whilst most Arsenal fans may well disagree with me, I believe they’ll be in a stronger position than most within a few years, especially when Financial Fair Play takes a hold.  They’ve started to operate within their means and are trying to build a structure that doesn’t rely as heavily on new acquisitions so much as developing future talent.  Personally, I think this is a more sustainable long-term model and if Arsenal fans can be a little more patient, just may see the fruits of such a strategy in the not too distant future.  I often have the same hopes for my own club, who are operating within a tight financial framework for altogether different reasons, but – under the stewardship of a shrewd Manager – have steadied the ship and have a somewhat healthier balance sheet than a few years ago.  The Manager has also built a good production line of young talent, and that has essentially helped the club survive. 

It was refreshing to hear a Chelsea fan on TalkSport recently, who offered that he would be more content with Chelsea winning the Champions League if they hadn’t, as he put it, “bought it”.  The ever lovable and arrogant Adrian Durham instantly rubbished the claims of said fan, clearly dismissing that anyone could have any sense of righteousness these days.  And, is that not the trouble?  Personally speaking, I would much rather see hard graft and team spirit earn success as opposed to the hollow reward of “buying” success courtesy of the football cockfight.  But, there doesn’t seem to be any place in our modern world for rewarding decent, honest hard work and endeavour.  Just look at the Banking sector.