What factors influence cash flow, how do clubs deal with negative cash flow and what is the situation at Everton under Farhad Moshiri, particularly in view of the mooted issue of new shares?
Jack Welch, the former CEO and Chairman of General Electric (GE), had a favourite saying. “If I had to run a company on three measures, they would be customer satisfaction, employee satisfaction and cash flow. Cash flow is the pulse, the vital sign of the company.”
If cash flow is so important, then what is it?
Cash flow is the net amount of cash being transferred into and out of a business. At the most fundamental level, the value of a company to shareholders is based on its ability to generate positive cash flows. For football fans it is important as it signifies the club’s ability to buy and sell players, build a squad and pay competitive wages over the long term. The list of football clubs (and fans) that have suffered due to failing cash flow is long and extensive – it is what destroys clubs – Leeds, Portsmouth, Wigan, Bolton, Bury, Newport County to name but a few.
Cash flow is calculated by looking at 3 principal areas: operating cash flow, from investing activities and finally from financing activities.
The most successful clubs (in normal times) generate cash from their normal operations, i.e. they generate more cash from income (matchday, broadcasting, commercial and sponsorship) than they spend on expenses (player wages and operating costs).
Clubs also generate cash from investing activities. For football clubs this means the purchase and disposal of player registrations. For many clubs, player trading is a fundamental part of their business and can (especially in inflationary times) generate significant cash flows for further investment in talent. The reverse is also true, in deflationary times or perhaps through poor player acquisitions, player trading can reduce cash flow. For example, a raft of poor purchases that become difficult to sell plus the need to replace those purchases to be competitive on the field has a massive impact on cash flow. Everton, in particular, are a case in point with a series of poor player acquisitions either sold at a cash loss or in the case of not being able to sell having considerable wage costs to incur on non productive assets. As Evertonians are well aware, this is compounded by the need to acquire replacements.
If operations or investing activities do not generate positive cash flow what can clubs do? In the first instance if they have built up cash reserves in the past (Arsenal are the prime example of a club with significant cash reserves) those reserves can be used as a buffer between costs and income. Most clubs are not in that position and have to look to alternatives.
In the first instance debt is used. Even in pre-Covid times many clubs used future income as a means of generating cash through borrowing from banks (in the case of the largest clubs) and other specialist lenders (in the case of smaller clubs or those with poor credit profiles). Even in the income rich Premier League, many clubs have used future season ticket revenues and/or future broadcasting awards as security against short term debt usually repayable at the end of each season/financial year, only to be re-instated immediately after. This is both expensive in terms of interest payments and can also be inefficient in terms of the fees paid to arrange and administer these arrangements.
Finally there is shareholder funding. This is where the owner or owners provide funding for the club either through interest bearing debt with a defined term, non interest bearing and non term defined debt and finally through the issue of more shares to some shareholders (a placement) or all shareholders or indeed new shareholders (an issue).
Whilst debt and shareholding funding is very normal business practice, in football if the club is not profitable or is losing money outside of fairly strict limits, then both UEFA and the Premier League, then this form of funding is not sufficient alone to pass the financial regulatory tests (in normal times).
Before looking specifically at Everton, it should be noted that Covid-19 above all else impacts cash flow with the almost complete absence of matchday income, the potential for a reduction in sponsorship and broadcasting revenues plus limited opportunities for player trading profits.
Now, looking at Everton and specifically the 4 complete financial years that Moshiri has been the major, then majority shareholder:
|Cash Flow Analysis – Moshiri 4 complete years £’000s||30-Jun-20||30-Jun-19||31-May-18||31-May-17||Total|
|Net cash flows from operating activities|
|Operating cash flows before movement in working capital||(42,781)||(23,211)||(8,633)||27,453||(47,172)|
|Net cash generated from/(used in) op’s||11,059||(9,825)||(6,821)||22,716||17,129|
|Cash flows from investing activities|
|Proceeds from disposal player registrations||85,751||67,098||52,756||30,823||236,248|
|Proceeds from sale of fixed assets||40||7||47|
|Purchase of player registrations||(128,395)||(134,796)||(155,828)||(70,554)||(489,573)|
|Purchase of fixed assets||(7,638)||(1,926)||(7,920)||(5,737)||(33,221)|
|Shareholder loans treated as equity||49,999||149,250||44,775||104,475||348,499|
|Net cash flows used in investing activities||(241)||69,666||(66,381)||59,018||62,062|
|Cash flows from financing activities|
|Repayment of borrowings||(18,750)||(75,500)||(57,520)||(151,770)|
|Repayments finance lease||(20)||(34)||(54)|
|Net cash flows from financing activities||18,157||(41,887)||73,041||(69,361)||(20,050)|
|Cash at bank at beginning of period||27,429||9,475||9,635||(2,737)|
|Cash at bank at end of period||56,404||27,429||9,475||9,635|
Let’s look at the 3 main contributors (or not) to cash flow.
Firstly, from normal operations over the 4 years ( June 2016 – end June 2020) normal operations say a negative cashflow of £47.172 million, much of which is incurred in 2019/20.
However, as companies try to do, by increasing creditors (a person or company owed money to) over and above any increase in debtors (a person or company that owes us money) it is possible to turn cash flow positive. So for example, in 2019/20 Everton generated net cash of £11 million by increasing creditors (in particular HMRC which increased from £16 million in 2018/19 to £41 million in 2019/20 – a payment which is due before 30June 2021)
As mentioned earlier the buying and selling of players has a huge impact on cash flow. As is well documented, in the last four years (and in 2020/21) Everton have spent significant sums on players seeking a squad with sufficient playing quality to finish high in the Premier League and reap the financial rewards of European qualification. Sadly, we know this strategy hasn’t been successful to date. As a result in cash terms, player acquisitions to June 2020 have cost the club a staggering £489 million (plus another £70 plus million from last summer) whilst we have raised £236 million from player sales. Add in the purchase of fixed assets and over 4 years (before Moshiri’s loans) a negative cashflow of £286 million from investing opportunities. Now not all this has been wasted as clearly we have acquired a number of players worth more than we acquired them for, but this is an analysis of cash spent and received from investing activities.
To fund such acquisitions, Moshiri to June 2020 has provided a total of £348.5 million in non interest bearing and non term specific loans. Because of the lack of repayment terms they are viewed as equity, but as things stand they remain as loans. Without these loans we could not have been so active in the transfer market (nor engaged in other investments Finch Farm, Goodison and the preparation for Bramley-Moore)
To assist cash flow over and beyond operating and investing activities, Everton have used short term debt. The net cash flow of loans from ICBC (now wholly repaid), Santander, Metro bank and Rights and Media Funding is negative over the period by an amount which is only slightly greater than the interest cost. Again though without continued and continuing use of such facilities, Everton could not operate without higher cash flow contributions from investor or operation contributions. They form a critical part of our day to day financing.
As a result, to a degree compounded by Covid-19, Everton could not have operated in the manner that they have without the financial commitment of the majority shareholder.
The bottom line of the above table shows cash in the bank increasing by some £46 million over the 4 year period but to a large extent that is an illusion – it’s funded by the shareholder loans of £348.5 million and an increase in the net creditor/debtor position of the company.
The question for Moshiri is (i) how long is he prepared to fund losses (ii) how long will the regulators allow such losses and (iii) how does he restructure the debt position of the club to provide reassurance to potential stadium lenders and also make his own position more secure with the club.
His commitment to the playing side and the acquisition of Ancelotti suggests he still sees the potential of European football to help re-balance the finances in the years to come (which will also give relief for point (ii) in the future).
The remaining question to be answered is point (iii).
Potential placement of new shares
As has been seen above, the club has survived by cash injections from player sales, increased debt, an increase in creditors and critically the continued financial support of Farhad Moshiri.
At the time of publication of the most recent accounts the club released information about a proposed placement of up to £250 million worth of new shares. The placement would be supported in its entirety by Farhad Moshiri through his company Blue Heaven Holdings. It is worth therefore looking at how exactly this is achieved and the impact it has on existing shareholders.
What a company can and cannot do and the protections afforded to shareholders are covered by statute and the provisions of a company’s articles of association. In the case of Everton both the Companies Act 1985 and the Companies Act 2006 apply, as do the most recent articles of association (amended in 2008).
Firstly, the right of the company (The Everton Football Club Company Limited) to issue more shares. (An issue of shares is when a company creates new shares which it sells to shareholders as a means of raising cash) The right to issue more shares in laid out in Section 8 of the articles.
Using the above, an ordinary resolution of a general meeting (requiring greater than 50% approval) is sufficient to increase the share capital. However, this would allow all shareholders to participate in the offer of new shares through existing pre-emption rights (the rights of shareholders to acquire new shares in line with their existing holding).
The plan though is to make a placement of shares to which only Moshiri will participate. How is that achieved? It can only be achieved through a special resolution (requiring greater than 75% approval) denying all other shareholders their pre-emption rights. At the time the general meeting is called, a written statement provided by the directors must be included with the resolution. The written statement supporting the special resolution must include the following:
- The reasons for making the recommendation
- The amount to be paid to the company in respect of the allotment
- The directors’ justification of that amount.
With Blue Heaven Holdings in possession of 77.23% of the clubs shares, Moshiri does not need to call upon additional shareholder support to pass the required special resolution. Thus he can (after following due process) with the support of his directors be the sole recipient of new shares.
From the briefings by the club the share placement would be up to £250 million. Of that £250 million, £100 million would be fresh investment – including the £50 million committed in November 2020, a further £50 million injection and a capitalisation of existing shareholder debt up to the value of £150 million.
The capitalisation of some of the existing shareholder loans strengthens the balance sheet (necessary for the external stadium financing) and strengthens Moshiri’s position with the club.
It is likely that the new shares be offered at £3,000 per share. If the proposed maximum of £250 million of shares were issued this would have the following affect:
|Existing shareholding||%||Shares issued at £,3000||New shareholding||%|
|Blue Heaven Holdings||27,031||77.23||83,333||110,364||93.27|
What would be the impact of Moshiri passing through the 90% shareholding threshold?
Firstly, minority shareholders lose the (possibly mute) authority to ensure a poll is undertaken to pass resolutions at general meetings. At above 90%, Moshiri can override that requirement. Secondly, and perhaps more importantly, if Moshiri was to make an offer for the whole company then the minority shareholders have no option but to sell their shares. It is important to stress two points:
By virtue of the placement (as described above) he is under no obligation to acquire the minority shareholdings
it should be said that Moshiri has always stated it was his intention to allow minority shareholders to retain their shareholding. Obviously if Moshiri was to sell the club at some point in the future, there is no guarantee that that undertaking would be honoured by a new owner.
Further information will be provided by the club in due course. What is clear from all the above is the extent to which Moshiri has committed himself to the club financially. What is not clear is whether the money has been spent wisely or whether the board and the executive have the necessary skills to turn around the operating and investing performance of the club.
In the meantime Moshiri confirms a commitment of £350 million already received, a further £50 million committed in November and an additional £50 million at a yet to be determined date.
All this and we haven’t even spoken about what he will have to commit to Bramley-Moore!
Reader Comments (27)
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1 Posted 28/12/2020 at 18:00:10
2 Posted 28/12/2020 at 19:30:32
3 Posted 28/12/2020 at 19:31:51
4 Posted 28/12/2020 at 20:17:56
Many thanks for your analysis. Your last paragraph is absolutely crucial – but alas unanswered. How on earth can an enterprise in this state take on an additional debt of £500m+?
Okay, the seating capacity will increase by one-third but, since cash at the turnstiles only represents about 15% of income, it is simply impossible to see how this equation was ever meant to balance. Unless the season tickets go up by 2 or 3 times and mortgage repayments are non-existent.
And oh, I forgot, the city loses its UNESCO World Heritage Waterfront status. Let's hope the Planning Committee turns it down and Everton are saved from bankruptcy.
5 Posted 28/12/2020 at 21:45:50
We need Moshiri to reach Champions League and we need Champions League to repay Moshiri. And we certainly need both to pay for Bradley Moore in a reasonable timeframe.
What would be most illuminating is to see other clubs positions side by side. Are we all walking such a tightrope?
6 Posted 29/12/2020 at 01:09:29
It really is a high-risk stategy, without changes in Management effectiveness. I always heard warning bells when dealing with a business that was undertaking a big project to pull its cash flow round.
Not comfortable with any of this.
7 Posted 29/12/2020 at 02:13:28
8 Posted 29/12/2020 at 12:29:54
9 Posted 29/12/2020 at 14:20:21
10 Posted 29/12/2020 at 15:15:59
Moshiri F.C. or bust.
11 Posted 29/12/2020 at 15:41:06
I worry about the day that Moshiri is unable or unwilling to continue funding the club.
12 Posted 29/12/2020 at 15:52:09
13 Posted 29/12/2020 at 22:29:23
14 Posted 29/12/2020 at 22:55:35
15 Posted 30/12/2020 at 13:36:34
In short our board lacks commercial acumen despite the good will and deeds from them in recent years, and we are wholly reliant on FM bankrolling us. Until we address that fundamental point it will be a slog for us and the new stadium adding a new commercial dimension on the horizon!
16 Posted 30/12/2020 at 15:05:23
If Bramley-Moore Dock had never been mentioned, but somebody said to you now, 'Is there any chance we can stay within FFP and then raise £500m (or whatever the final figure will be) for a new stadium', what would your reaction have been, do you think?
17 Posted 30/12/2020 at 15:30:38
Some leeway for the Covid losses and monies spent on the stadium, women and academy, but with the last three years showing losses of £13m, £112m and £140m you can see how far away we are. I estimate if you deduct losses for Covid, stadium, women and academy our cumulative losses are still around £135 million for the period 2018-19-20.
The stadium costs, as I say above, are not included in the FFP/PL calculations.
18 Posted 30/12/2020 at 15:36:16
19 Posted 30/12/2020 at 17:04:07
The lenders will hold the stadium and all the income generated by it as security. However, the lenders will also want the club to become more sustainable.
20 Posted 30/12/2020 at 19:53:12
The elephants in the room for me are:
1) If Usmanov comes up with £100M for the privilege of naming rights, he really is a True Blue.
2) How are we going to service the debt with our fanbase? The good citizens of L4 just don't have the disposable cash to start lashing out on blue bubbly etc on matchday. Everton must currently have one of the lowest matchday incomes in the country. That's not going to change when we move, it seems to me.
I don't think the new stadium will be a huge attraction to the commercial sector either, cos we've got bloody Liverpool with their six Champions Leagues, and Man City and Man Utd 20 miles away, we'll be a poor fourth whatever happens.
I think there is a real risk FFP will knobble us in the medium term, we won't have much for players cos the stadium won't generate the anticipated income to pay for itself.
3) Moshiri's £100M will need to be paid back when he sells. So, for him to make a profit, he's going to need someone to hand him what, half a billion pounds for the privilege of owning Everton. I just don't see how that is ever an attractive proposition.
21 Posted 30/12/2020 at 21:03:05
Just as long as they've got themselves a good deal off Peel holdings for helping to kickstart the whole scheme...
22 Posted 30/12/2020 at 21:22:47
I think that's what concerns me, from the information I have in front of me; if it was my money there is no way I would be spending it on this. But there may well be parts of this deal which are just below the surface at the moment.
Of course, if that is the plan, there is also the danger that we become like the fatted calf, an entry into unlocking that whole area, but that once that is achieved we become surplus to requirements, and they then turn the taps off.
It's worth bearing in mind that, if he did decide to cut his losses, a fire sale would enable him to get back his investment, so the risk for him may not be high. He may not be bothered if he saddles the club with an enormous debt and lets it buckle under it once he's made his money.
23 Posted 30/12/2020 at 21:38:04
24 Posted 30/12/2020 at 23:42:24
Whilst it represents a commitment and is exceptionally good PR it does not represent a major investment by Moshiri.
25 Posted 31/12/2020 at 10:58:39
Many will remember the issue of new shares, underwritten I believe by Johnson, which raised a then substantial sum for the club.
From memory, I think it was £15million or £20million, which may not seem much now, but I think I am right in saying this was in those days three, four or five times the cost of building the Park End stand.
This shares issue came AFTER Johnson's purchase of John Moores' stake, which gave him control of the club, and - someone please correct me if I'm wrong - this deal involved a placement of new shares.
I think it was 2,500 new shares (I may be wrong about that figure) but I believe I am correct in saying that deal took the total number of shares in the club to 5,000.
A year or so later came the issue of new shares, I think 30,000 new ones were issued, with each shareholder being offered the chance to buy six for every one held, taking the total of new shares up to 35,000.
This was underwritten by Johnson so, I think I am right in saying, if a shareholder did not take up the offer, Johnson bought the extra shares.
Johnson gets criticised a lot. I know that I was quizzical at the time, as I tried to get my head around Everton finances.
But I think he should at least be given credit for putting money into Everton. Technically, isn't he still the only person to do so?
Finally, I must say thanks for an excellent article, Paul.
26 Posted 04/01/2021 at 01:18:23
I thought that it might be instructive to look at a similar recent stadium build in a city, viz Spurs' new ground.
1) The original estimate for the total cost was £400M. It is generally thought to have finished up costing £1,200M. It might, therefore, be very useful to us all if you presented a sensitivity analysis with a cost of £500M (the official estimate) vs £1,000M (rough approx. based on different capacities at Spurs and Bramley-Moore Dock.
2) Daniel Levy is reported to have secured a package of loans of £525M at an unbelievable 2.66% APR, or £37M pa over 23 years. I wonder whether USM can match this?
3) I think that you assumed that future ground receipts would pay off the annual mortgage repayments. However, Spurs' season tickets range from £795 to £1,995 whereas Everton's are presently from £420 to £565. So football is approximately 2.8 times more expensive to watch at Spurs' new ground. Could Everton fill the ground every week (as at present) at these prices?
4) Spurs produce matchday revenue of £100M pa at these prices.
5) I think that USM have already bought (or have an option to buy) the naming rights at £200M for 10 years.
6) As someone rightly pointed out earlier, "losing" the matchday revenue puts a tremendous burden on the club to fund wages and transfers without regular Champions League participation. Huge amounts already spent (thanks to your superb analysis) have completely failed to achieve this nirvana. What hope for the future?
7) From where I am, an improved Stanley Park end and moved church could push the capacity of Goodison Park to ~45k and keep our most illustrious ground at a fraction of the cost of the dock option.
Man Utd and Liverpool improved by evolution and have enjoyed fantastic periods of European football. Food for thought...??
27 Posted 04/01/2021 at 20:54:59
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