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Record losses, partly attributed to Covid, Moshiri’s funding plans & stadium finance update

An assessment of Everton's accounts for 2019-20

Record losses, partly attributed to Covid, Moshiri’s funding plans & stadium finance update

There are two headlines from today’s release of the report and accounts to June 30 2020. One is a record loss of £139.9 million of which the club attribute £67.3 million directly to the impact of Covid-19. However, that fails to acknowledge underlying losses of £72.6 million resulting from expenditure remaining much higher than income.

The second item of note is the continued financial support from Farhad Moshiri, £350 million up to the end of the accounting period, a further £50 million in November 2020, and a commitment to further fund the club through a placement of new shares, more of which below

Financial Year 2019-2020

Revenue

£m	2019/20	2018/19*	Change %
Broadcast	98	132.70	-26.15
Matchday	11.9	14.20	-16.20
Sponsorship/Ad/Merch	63.7	29.10	118.00
Other commercial	12.3	11.70	5.13
Total	185.90	187.70	-0.96

Broadcast revenue reflects the following: 31 out of 38 games played in the period so only reflects the pro-rata revenue. The revenue from the remaining 7 games will appear in the 2020/21 accounts

Matchday reflects the absence of supporters from the March lockdown onwards

The club are making big claims on the increase in commercial income. Whilst no doubt commercial income has increased, these figures include the £30 million received from USM in relation to the naming rights option. Remove the £30 million (which is a one off payment) and commercial income has grown by 12%, a reasonable performance but still relatively low if the objective is to catch up rivals.

The accounts show a total loss of revenue arising from Covid-19 at £33 million (plus £34 million of associated costs, see below)

Operating expenses

	2019/20	2018/19*	Change £m
Staff costs	164.8	160	4.8
Other operating costs	33.1	43.1	-10
Depreciation	6.9	6.5	0.4
Operating costs pre player/management trading	204.8	209.6	-4.8
Bramley-Moore costs	19.9	7.2	12.7
Provision for onerous contract	4.4	0	4.4
Pension revaluation	0	0.5	-0.5
Operating expenses and exceptional items	24.3	7.7	16.6
Operating loss pre player/management trading	-43.1	-29.6	-13.5

• Staff costs increase by £4.8 million to £164.8 million (88.6% of turnover)
• Other operating costs fell by 23% to £33.1 million
• Bramley-Moore costs £19.9 million reflecting planning application, revised design and preparatory expenditure
• Operating loss increases by 45.6% to £43.1 million

Profit/(Loss) including player trading

£ millions	2019/20	2018/19*	Change £m
Staff costs	164.8	160	4.8
Other operating costs	33.1	43.1	-10
Depreciation	6.9	6.5	0.4
Operating costs pre player/management trading	204.8	209.6	-4.8
Bramley-Moore costs	19.9	7.2	12.7
Provision for onerous contract	4.4	0	4.4
Pension revaluation	0	0.5	-0.5
OC and exceptional items	24.3	7.7	16.6
Operating loss pre player/management trading	-43.1	-29.6	-13.5
Operating loss pre player/management trading	-43.1	-29.7	-13.4
Amortisation	-99.2	-95.1	-4.1
Impairment of player registrations	-26.3	-2.5	-23.8
Amount payable to former employees	-6.6	0	-6.6
Profit on player trading	40.5	20.3	20.2
Statutory loss before interest & tax	-134.7	-107	-27.7
Interest and tax	-5.1	-4.9	-0.2
Statutory loss	-139.8	-111.9	-27.9
Loss directly attributable to Covid-19	67.3	0	67.3
Underlying loss	-72.5	-111.9	39.4

Onerous contract charges of £4.4 million relate to the re-valuing of an existing contract due to Covid-19. Contract unspecified by club due to commercial confidentiality

Amortisation increased to £99.1 million reflecting continued investment in the playing squad

The value of player registrations dropped by £26.3 million reflecting the lower value of players in the Covid-19/post Covid world

Marco Silva and his staff’s departure cost £6.6 million

Player trading profit increased to £40.5 million through the sales of Gueye, Lookman, Vlasic and Onyekuru

Interest and tax costs £5.1 million

Statutory loss of £139.9 million of which the accounts claim £63.3million is directly attributable to Covid-19. This is calculated by the £33 million loss of revenue plus the impairment charges

Whilst the club is right to highlight the impact of Covid-19 on revenues and the additional costs in terms of impairment, it should not escape anyone’s attention that even without Covid losses since Moshiri acquired 49.9% in February 2016 amount to more than £190 million despite over £210 million in player trading profits. Add in Covid and that rises to more than £250 million.

What is clear is that costs continue to outstrip income. This arises from the legacy of 2017/18, the failure to increase commercial income beyond that of USM, and the ongoing costs of Bramley-Moore. When planning permission is eventually granted those costs will be capitalised and will improve the Profit and Loss account by some £40 plus million.

How have we funded such losses?

We have funded the losses from three sources

• Player trading (see above)
• Shareholder loans
• External debt

I have already noted the £210 million in player trading profits since Moshiri arrived in 2016.

Since his arrival (to the date of the accounts 23 November 2020) Moshiri has provided the club with a total of £400 million in shareholder loans.

External debt (partially as a result of Covid) has grown too

• £40 million secured against future broadcasting revenue supplied by Rights and Media Funding
• £18.7 million through Metro Bank through the The Coronavirus Business Interruption Loan Scheme

Connected Parties

Those that read the detail of the accounts may notice that USM no longer appear as a connected party in the accounts (due to Moshiri’s shareholdings in USM and Everton). Moshiri’s shareholding in USM has changed to the extent that USM are no longer considered to be a connected party to Everton. As a result the accounts will no longer detail the degree of financial support USM provide Everton.

Moshiri’s continued financial support

The club announced their intention to issue new shares to Farhad Moshiri through Blue Heaven Holdings Limited. The shares will represent up to £250 million reflecting his previous loans and his recent commitment to a further £50 million injection in November. As a result (including the November injection) at least £100 million will have been provided and up to £150 million of existing shareholder loans will be converted into shares. At a price of £3,000 a share Moshiri’s shareholding in the club will increase to above 90% assuming he takes up the full placement offered. Moshiri continues to support the continued holdings of smaller shareholders and I am informed that intention will not change.

It should be noted also that the financial support is directly from Moshiri, it is not of Usmanov’s doing, Moshiri should be given the credit for his financial commitment.

Bramley-Moore Funding

The club continue to make progress on the funding package for Bramley-Moore. Ostensibly there are two options, the type of construction funding used by Arsenal and Tottenham Hotspur in the early days of their stadium financing – so called construction funding (before converting to long-term debt) or as Everton hope, to be the first club to achieve long term funding through private placement during the pre-construction/construction phase. The club is currently completing their due diligence obligations to potential lenders through JP Morgan and Mitsubishi Bank. When completed the club will have access to draw down facilities to be used through the construction progress. It is hoped that the interest costs of such lending will be capitalised until the stadium is operational (a standard practice on construction lending, less so in the private placement market). If Everton achieve a private placement in the pre construction/construction phase it will be highly innovative.

Conclusion

It is clear that Covid-19 has impacted the financial performance of the club in the year 2019/20. That impact will continue to be felt in 2021/21. However it is also clear that even in normal conditions the club continues to have costs greater than income. This can only be addressed by reducing the number of unproductive players previously acquired plus a much greater concerted effort to build revenue streams around the globe, even in a post Covid world.

The issue of Premier League Profit and Sustainability rules, let alone UEFA’s Financial Fair Play have not been addressed in these accounts partially due to the effective suspension. However, when looking though the impact of Covid-19 it is clear we would not comply to the previous existing rules and regulations.

Having an owner prepared to soak up losses is an enormous luxury. As I have consistently spoken of, we must become sustainable through increasing income whilst reducing costs not least because of Profit & Sustainability and Financial Fair Paly. Continual player sales and/or shareholder bailouts are not a sustainable model.

Moshiri for all his financial support must address the management of the club at board and executive levels and bring people in who can make his business sustainable. He (and the club) are carrying a huge cost in not doing so.

Having someone to fund losses is not (despite his apparent willingness to do so) good news. Having people who turn losses into profits is far more preferable.

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