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Friday, November 18, 2011

What Price Everton Football Club?

Prior to Everton’s next home game there will be the second in a series of planned demonstrations by Evertonians who propose not only a change in ownership but a mechanism for positive change that will ensure that the best interests of the club will be the overriding consideration when evaluating prospective owners who can best demonstrate a solution to the stagnation that has enveloped Everton like a shroud in recent years.

Saturday’s game against Wolves could provide a pivotal indication to Everton’s fortunes this year. Entering the second quarter of the season, Everton, following a run of games in which they’ve played most of the premier league’s top clubs, find themselves one point above the relegation zone.

Wolves, one point ahead, are representative of a group of teams Everton must take three points from in the coming months; in fact anything less than an emphatic victory on Saturday will leave the long suffering match going Evertonians despondent.

Evertonians will also be mindful of the recently confirmed speculation over numerous parties who have expressed an interest in the ownership of the club. Questions put to KEIOC by concerned Evertonians appear to centre on three areas....

  • How much is the club up for sale for?
  • Is the club really up for sale or are they looking for an investor?
  • Who actually owns what is being sold?

If we can begin with the apparently perplexing question of how much money is being asked for the club. Putting a valuation on any business can be complicated process; it’s not an exact science, it’s a mixture of objectivity and subjectivity

Supporters of Everton, indeed even the small shareholders of Everton, are merely interested bystanders in this process; they have little access to current financial information so the best that can be achieved is a good old fashioned educated guess.

The last published accounts cover a period up to May 31st 2010, you can see the problem, they’re eighteen months out of date;  2012 is almost upon us and even the next set of accounts, which are due to be published soon, are now six months out of date. Even with the information in the accounts it’s difficult to provide an accurate evaluation of the value of the business.

The first thing that should be understood is that any value placed on a business is purely theoretical; many formulas and calculations can be employed, and every formula will give you a markedly different answer, but value should not be confused with price; the price is the important figure and that will be determined through a business negotiation between buyer and seller.

One common misconception is that a valuation can be simply identified through market capitalisation, the traded value of a share multiplied by the shares issued. Unlike a company quoted on the stock market, Everton, being a privately owned company, trade their shares on a matched bargain basis, a private agreement between a buyer and seller; so whilst accurate information is difficult to obtain recent transactions indicate that shares are being traded at £1,250 which would indicate Everton, with 35,000 shares issued, has a market capitalisation of approximately £44m; this isn’t the value of the business, this is simply the perceived value of the equity.

Whilst this figure wouldn’t appear to be a million miles away from a fair valuation, it clearly fails to address important intangibles, in the literal sense, such as the complexity and nuances of a football clubs balance sheet, whereby the valuation of players is unrepresentative of their true value due to amortisation and the zero valuation of home grown players such as Jack Rodwell, Ross Barkley and others.

A clear example of the effect of amortisation, the process by which players initial value is written off over the period of their contract, can be seen with the sale of Arteta. The 2011 accounts are expected to reveal a figure of approximately £33m for the players; Arteta, due to him being here for seven seasons, would be represented by a negligible amount of this £33m yet he realised £10m, conversely the sale of Yakubu probably saw Everton receive less than his book value, but still represented a good business move as it removed the effect his considerable wages had on the profit and loss account.

It also fails to account for the perceived value placed on items such as brand, presence in the world’s premier football competition and therefore opportunity for worldwide exposure, Everton’s rich history and, dare we suggest, even the possibility of the Football Quarter; all of these items can attract a positive quantifiable valuation in favour of the vendor. By contrast the prospective purchaser of Everton will take into consideration the need to invest heavily in the team, the major investment in infrastructure that is required and the recent performance of the club, its catchment area and geographic location.

Valuation analysis can be presented in many forms; discounted cashflow analysis [income approach], asset valuation and benchmark analysis [market approach] are just some of the categories which offer a multitude of formulas that are designed to value a business.  Football clubs are mainly valued using either the income approach, where future cash flows are modelled, discounted, and then calculated to obtain the net present value of the business, or the market approach, in which financial coefficients are calculated from observations of other football clubs recently sold and are then applied to specific statistics such as turnover, cash flow or operating profit.

Ultimately the buyer and the seller are attempting to agree on the Enterprise Value of the business, the value plus the debt. It’s quite obvious that this complicated process requires information that simply isn’t in the public domain, as it is commercially sensitive and confidential, hence the need for non-disclosure agreements during the process of delivering the more critical aspects of the valuation.

Enterprise Value is traditionally calculated by adding the aforementioned market capitalisation to the debt less any cash or equivalents; this would “value” the business at approximately £90m but you can see the flaw immediately, the figure fails to accommodate the elements of goodwill such as the true value of the squad, the brand, the presence in the premier league etc.

If these elements of goodwill really do provide a tangible benefit to the business then they’ll manifest themselves in Everton’s earnings, as the performance of the players and the brand commercially is demonstrated in the profit and loss account. The figure used [EBITDA] can fluctuate widely and can be improved vastly through efficiencies therefore, as was stated earlier, the methods employed in valuation are numerous and none provide a definitive answer, only a starting point for a negotiated agreement on the price the seller is willing to sell at and the buyer is willing to buy at.

A very simple example of identifying the value of the whole business is to use a calculation which employs information that is readily available; the use of EBITDA multiples which use normalised earnings, before interest, tax, depreciation and amortisation are applied, multiplied by a figure calculated from financial information and comparative company analysis which could range from anything from 2, 5, 10, 15, 20 etc. The sellers interpretation will be high, the buyers low.

Everton’s next accounts are expected to show a further decline in EBITDA from the 2010 figure of £1m to less than £500k; however, as previously stated, these figures are now six months old and there has been significant operating changes at the club in terms of player disposals, and therefore wage savings, which would suggest, taking other factors into consideration, that an extrapolated EBITDA figure for 2012 would be in the region of £7m.

Using a multiplier of 10, would give an Enterprise Value of £70m; strip out the current net debt, which, even with all the claims of money being paid to the banks, is difficult to see below a figure of £35m, would leave approximately £35m for the shareholders. It should be noted that the net debt figure could be higher or lower as could the multiplier.

Bill Kenwright’s dissolved vehicle, True Blue Holdings, purchased 69% of the company for £21m in 1999. The chairman claims to speak for Jon Woods, Robert Earl, Philip Carter and Arthur Abercrombie; he boasted “we’ve got the Club, we own 75%” at the meeting with the Blue Union members earlier this year. Using the above valuation this Kenwright collective would receive less than £10m profit; Robert Earl would receive less on a pro rata basis as he allegedly purchased his shares from the Gregg family in 2006.

A more extreme view, one that is obtaining ever increasing support, is that due to their business performance over the past decade and the lies, deceit and contempt shown to fellow shareholders and fans on many occasions, those that Bill Kenwright represent are entitled to nothing and should accept responsibility for a catalogue of unmitigated disasters; you take a gamble when you buy shares and they’ve lost.

Whilst KEIOC and the Blue Union don’t officially subscribe to this theory we can appreciate the sentiment. If you were to take a sheet of A4 paper and draw a line down the middle and then list the failures on the left, putting a monetary value against those where applicable, for example the NTL fiasco which resulted in the £30m Prudential Securitisation which will cost the club over £30m in interest and has prevented the redevelopment of the Park End, you clearly see the detrimental effect their policies have had on the club. If you then list the positives on the right you can begin to understand where some people are coming from.

KEIOC endorse the official position of the Blue Union. We believe that real change should be brought about through the appointment of professionals who can demonstrate success in the field of sports business disposal and that the primary consideration of the sale should be the future wellbeing of the club and not simply the return on investment

To bring about the sale we would expect that those tasked with the sale process would identify suitable candidates and on receipt of a business sale briefing document, which would include an executive summary, a history of the company, financial performance and, most importantly, a guide price indicating that offers in the region of £110m would be welcomed and lead to negotiation, signing of a heads of terms document, due diligence and ultimately the successful sale.

With regard to those questioning whether the club is genuinely up for sale or whether Bill Kenwright is attempting another potentially catastrophic “new investment” process we only have the word of the club chairman and the officials.

One thing we are keeping a close eye on is the calibre of the parties that allegedly have expressed an interest in Everton. The Indian company, The Jain Group, led by Mannoj Kumar Jain, would appear to exhibit little capacity or resources to successfully complete the takeover of the whole of the business. As can be seen in their accounts one division of their company, their infrastructure business, involved in the INR 2.2bn proposed Kolkata Sports City, appears to have a turnover of just £113m; it is unknown how the rest of the group perform.

Their emergence coincided with the reappearance of absent director Robert Earl, fuelling speculation that it is just his shares [8,146] that are being offered in another FSF type investor scenario offering jam tomorrow as was the Earl acquisition which similarly failed to materialise; but at least we did get Rocky.

More unconfirmed speculation has involved alleged interest from Qatar. This interest first emerged prior to the attempt to relocate Everton to Kirkby. It then involved the sovereign wealth fund QIA, the Qatari Investment Authority, controlled by the ruling family of the Emirate, Al Thani. Any speculation involving QIA is nonsense as they own a controlling stake in Paris Saint-Germain and Article 3.01 (c) of UEFA’s regulations states that in order to ensure the integrity of the UEFA club competitions “no individual or legal entity may have control or influence over more than one club participating in a UEFA club competition”. Such control or influence is defined as “holding a majority of the shareholders’ voting rights” or “being a shareholder and alone controlling a majority of the shareholders’ voting rights pursuant to an agreement entered into with other shareholders of the club”.

In the case of QIA, who are using football to improve Qatar’s international standing and enhance its image, UEFA has confirmed that the investment vehicle would not be able to go beyond the 49 per cent threshold at any club but despite this ruling Malaga CF is also in the control of the Al Thani family, this is in the sole ownership of Sheikh Abdullah Al Thani.

It is thought that Blackburn’s owner problems have attracted the attention of another Qatari company, Qatar Petroleum, who are, not surprisingly, under state ownership.

Whilst it would be difficult to see how any of the above could provide the solution to Everton’s problems none could be described as worse than what we currently have; however, interest from one party, the American, Jerome L Simon, should be viewed with caution by wary Evertonians; he has been quietly purchasing shares in Everton and has a proclivity for buying distressed companies and leveraged buyouts; exactly what KEIOC and the Blue Union are concerned about. It is becoming increasingly obvious that there is a real need to bring in professionals who can conduct the sale of the club. The selling off of just 23% of the shares simply isn’t acceptable.

In answer to the final question, who owns what is being sold, there’s clearly a substantial question mark over 49% of the clubs ownership. KEIOC was informed, more than three years ago, that Philip Green paid for the shares allegedly owned by Robert Earl; shares that are declared in the ownership of BCR Sports, a British Virgin Islands offshore company whose true ownership cannot be confirmed hence the valid speculation. The person who told KEIOC about this was the previous owner himself, Paul Gregg. He stated, “I was paid, for my shares, by Philip Green.”

The remaining 26% that are questionable are those owned by Bill Kenwright; how he managed to raise the money for those shares is a conundrum in itself; if, as many believe, he initially borrowed the money from Anita Gregg and she was repaid, the obvious question is who provided the money?

Bill Kenwright has openly admitted that he accepts business advice from Sir Philip Green and that he is simply a close friend who happens to be one of the world’s greatest business brains; KEIOC wouldn’t disagree with this, take a look at this video and listen to him describing his company and their actions.

He tells you that his company, Arcadia, are investors, that they’ve invested £80-90m in the past five years and that they need to continue to invest, that they aren’t heavily geared, that they have lots of assets, that if you want to build a brand you have to create location; all sounds like great advice, I wonder why Everton haven’t accepted any of it? Perhaps the clue lies in where the interviewer asks “you sound like you’re extremely hands on?” and Sir Philip answers, “yeah, it doesn’t work otherwise”.

When Sir Philip was asked about Everton by the former leader of the council Warren Bradley, Warren being a staunch match going Evertonian, Sir Philip famously answered, “its run like a fucking circus”.

The previous CEO has told many that he was sacked by Sir Philip, it now emerges that there’s a possibility that no board meetings are taking place; somewhat strange for a company that are allegedly working 24/7 to sell the business. No doubt there will be more revelations in the proposed book on the Kenwright years.

Events over the past twenty four hours have confirmed two things; firstly, that the proposal concerning the appointment of independent professionals to conduct the sale of the club has significant foundation and secondly that if you are now genuinely concerned about the clear and unquestionable crisis at our great club then you need to participate in the Blue Union demonstration on Saturday.

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