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Friday, July 31, 2009

The Deal of the Century


In premiership football, success is little more than a contradiction. Supposedly successful clubs repeatedly post huge losses and have debts that are measured not in millions but in tens and hundreds of millions. Elsewhere, these businesses would be deemed failures, yet the premiership is one of the world’s richest leagues and its clubs are coveted by some of the world’s richest men. In simplistic terms input (money) precedes output (results, trophies, higher turnover and prestige); the dilemma for football club owners is how to most effectively obtain that input.

Figure 1

Figure 1

Looking at Everton's turnover, profits and losses, significant events are easily identified; the impact of the premierships new TV deal in 2008, a particularly poor financial performance in 2004, after which, it is alleged, administration beckoned before the sale of Wayne Rooney, in August, saved the club and produced the then record turnover and profit figures the following year. To put these figures in perspective they need to be compared against the turnover and profit / loss of other premiership clubs. As can be seen in figure 2 Everton lag significantly behind other rival premiership teams.

Figure 2

Figure 2

Figure 3

Figure 3

To remain competitive Everton must address their need to increase their turnover and profitability. Everton's CEO, Robert Elstone, describes the two emerging financial models in the premiership as the billionaire led model, a philanthropic approach, as seen at Chelsea and more recently Manchester City, and the facility and fanbase led model, a more business based approach as used by Arsenal, which Everton, through Kirkby, is attempting to emulate. KEIOC are fully supportive of this initiative but we remain heavily critical of the chosen location and the stadium as it is our belief that the club has been badly advised on some of the more critical aspects of this project.

Using available evidence, much of which was presented at the recent public inquiry, Kirkby appears grossly unsuitable for a stadium that is required to meet the future needs of Everton Football Club. Neither the current nor planned transport infrastructure in Kirkby can support the 50,000 seat stadium that was applied for; which means, if approved, Evertonians will have to accept the most rigorously enforced crowd management plan in premiership football, leading to the very real possibility of reduced attendances and lower than expected returns, made worse if public transport targets aren't achieved and the stadium capacity is capped.

Everton has forecast average attendance levels in the region of 47,000, which they say will generate an additional £6m of profit per season. Even if achieved it is difficult to see how such relatively small increases will deliver the difference to allow Everton to compete with the so called Sky four when in figures 2 & 3 it's evident that the club we finished behind last season had turnover in excess of £100m more than Everton and produced over £50m additional profit.

As can be seen in figure 4, KEIOC has conducted their own research and found that of all the new stadia built, only two, Arsenal and Reading, deliver anywhere near the 94% occupancy level predicted by Everton. KEIOC calculate that, once initial curiosity has subsided, attendance levels at Kirkby will be 20% lower than expected, just 5% higher than they are today.

Figure 4

Figure 4

All the above football clubs that have built new stadia had business plans, all had targets but none moved nine miles from their regional centre, none had a known 40% opposition against their new stadium and none were reliant on a transport plan that has been designed and promoted as what it so evidently isn't; it simply isn't feasible.

Above all, KEIOC remain vigorously opposed to Kirkby because it represents a missed opportunity; yes you will have unobstructed views, yes you will have better access to the concourse facilities and yes you will have better egress from the stadium, but wouldn't any new or redeveloped stadium offer you these improvements? A new stadium should deliver an enhanced total matchday experience for all fans and deliver the revenues that will allow the club to remain competitive with its peers; Kirkby achieves neither…so why was it described to Evertonians as the deal of the century?

That phrase will go down in Everton folklore…”the deal of the century” the fans were told…Tesco will contribute £50m towards the stadium cost…it all sounded too good to be true…and it was. A few months later Tesco clarified to Radio Merseyside that their contribution wasn't a donation to Everton Football Club, it was to be “derived from the value of the project overall”. Nine months later, after nearly every man and his dog had objected, KEIOC's prediction that the application would be called in for a public inquiry became a reality.

The public inquiry initially heard that the £130m valued stadium was to be financed by a £52m contribution from Tesco and a £78m contribution from Everton; however, the planning inspectors were left baffled when they attempted to understand exactly where this £130m was actually coming from. What was eventually heard was that Tesco's contribution appeared to be solely derived from the uplift in value of the land obtained from Knowsley Council and a £10m grant from the NWDA. Everton, having merely supplied a list of fund raising options, chose not to release a cohesive plan to deliver their £78m which led to a condition being placed on the application which means that Everton will now have to prove they have their funding in place before that infamous spade enters the ground.

So, Kirkby cannot be the answer, can it? For the fans it certainly isn't the deal of the century, nor is it for the club and its playing staff as it's unlikely that £6m will make a vast difference to a side that is widely acknowledged to be punching well above its weight; so just who is it the deal of the century for?

Perhaps the answer lies in a business ratio called the Total Debt Ratio, here it is:

TOTAL DEBT [CURRENT LIABILITIES + LONG TERM LIABILITIES]
___________________________________________________________
TOTAL ASSETS [FIXED ASSETS + CURRENT ASSETS]

What does it do? Well, it calculates the percentage of total funds that are provided by creditors to run the business. Clearly creditors prefer to see this as a low figure, the company would not be using too much of the creditors money to finance its business and in the advent of failure the creditor would stand an improved chance of reimbursement. The owner of the company on the other hand often welcomes a higher ratio as using other peoples money is often quite effective; however, companies with excessive total debt ratios are in danger of becoming insolvent…

For Everton, using their 2008 accounts, you can calculate the total debt ratio as follows:

TOTAL DEBT [£50,931,000 + £33,245,000]
___________________________________________________________
TOTAL ASSETS [£49,321,000 + £15,094,000]

Everton Total Debt Ratio 2008
Total Debt £84,176,000
Total Assets £64,415,000
Total Debt Ratio 131% X 100

Figure 5 compares Everton's Total Debt Ratio with other clubs:

Figure 5

Figure 5

Once again, it is relatively easy to identify where Wayne Rooney was sold and the reason why; the two preceding years demonstrate that their total debt ratio increased from 90% to 127% and then 160% before coming back to 99%. It will be interesting to see what the next set of accounts bring, disturbingly the CEO has already issued a warning to shareholders that the level of debt has increased quite substantially; are we about to see another undervalued asset cashed in?

Everton may have a high ratio but it's far from the worst in the premiership, Chelsea in particular are off the scale of this chart but with champions league revenue and the benevolence of their billionaire owner, who is their major creditor and therefore the reason for their high ratio, they can sleep easy…at the moment.

Living in the real world, Everton enjoy none of the aforementioned luxuries, they run a relatively tight ship in business terms and it doesn't take a genius to work out what effect gaining a £130m asset for substantially less outlay will have on their total debt ratio. Some accuse the owners of wanting to maximise the value of the club in order to get the best possible price for their shares when the club is sold; others claim that a new stadium will be used to attract a new owner / investor who won't have the financial burden of replacing or redeveloping an old and inefficient stadium, an owner who can concentrate on improving and strengthening the squad in a bid to push on to the next level.

Unfortunately there are quite a few flaws to this last theory; it assumes that a potential investor would be unaware that the overvalued new stadium bears all the hallmarks of becoming a white elephant, unable to deliver significant revenue streams in the future and built in a totally inappropriate location they'd be tied to it for twenty-five years. Incapable of being fully facility led, prospective new owners would still be required to contribute additional funds if they wanted to see the club in the champions league and winning trophies; if they don't want to see Everton there, why own a football club?

Bill Kenwright is perfectly entitled to make as much profit out of selling his shareholding as possible, but as chairman he also has the added responsibility of ensuring that the club is sold to someone who has the best interests of the club at heart. This means an individual or an organisation with the ability and financial strength to take the club forward, to compete, to win trophies, develop the fanbase and improve the Everton brand. Ask yourself this…if they had all those qualities, if they have the funds available to invest in the club, would they really choose to buy a club with a stadium they know will be unable to compete with those of the premiership elite for the next quarter of a century? It won't take prospective investors too long to work out what is the weakest link in the deal.

Everton has made no secret of the fact that they use their asset base to help finance their business. Selling fixed assets, particularly intangibles [players], has proved to be a useful source of additional income which they have exploited to their advantage; but clearly it's a finite resource and a more sustainable method of financing their footballing activities needs to be secured. Hence the plan for a new stadium and the statement that we are following a facility and fanbase business model; but there would appear to be genuine doubt that a stadium in Kirkby, even at the optimistically projected 94% occupancy, would be able to generate anything like the returns enjoyed by our rivals in the premiership.

Until this problem is addressed, through the sale of the club to someone or an organisation with the ability to deliver appropriate facilities and the quality of players that will enable Everton to compete, Evertonians should resign themselves to the fact that current players and up and coming stars will continue to be sold to finance the clubs financial shortcomings whilst we battle against the problem of bridging the staggering and ever diverging financial disparity between the top four and fifth placed Everton.

Figure 6

Figure 6

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