Thursday, April 29, 2010

How Big Is Arsenal's Transfer Budget?

Come with me, if you will, back to the beginning of this season, a time when most pundits graced us with their opinion that Arsenal were the club most likely to drop out of the top four positions in the Premier League, having spent very little and sold two of their established stars. With the team now virtually assured of third place, you would therefore think that this was cause for celebration, but most fans still feel a sense of disappointment. The humbling by Barcelona in the Champions League quarter-final was followed by defeat in the North London derby (the first time that Spurs had beaten Arsenal in the Premiership for over a decade) and the desperate collapse against a feeble Wigan side.

If it wasn’t evident before, it has become abundantly clear that Arsenal need to strengthen the side during this summer’s transfer window. We are not talking about a major rebuilding programme, but most supporters know where the priorities lie. First, no team is ever going to win the title with goalkeepers of the calibre of Manuel Almunia and Lukasz Fabianksi. There could also be significant changes to the central defence. The hapless Mikael Silvestre should be allowed to leave, while William Gallas’ contract is due to expire and at the age of 35 Sol Campbell cannot be a long-term solution, despite his sterling efforts since he returned. The squad would also benefit from another powerful defensive midfielder to cover for the much-improved Alex Song. After crashing out of the Champions League, even the loyal Arsene Wenger admitted that his side needed reinforcements, “We have to add something, for sure.”

"Good arguments for strengthening the squad"

The club has always maintained that it has the funds to compete in the transfer market and this was confirmed by chief executive Ivan Gazidis when commenting on the most recent accounts, “We have money available to invest in the transfer market when we can identify the right players to add into the mix that add something to the squad.” A couple of weeks ago, chairman Peter Hill-Wood gave an explicit green light for a spending spree this summer, “We have got more money than we’ve had for a long, long time and we would like to spend it. But we want to spend it sensibly. There is plenty of cash, although not in comparison to Manchester City.” His normally circumspect manager was just as bullish, “We can match Chelsea and Manchester United in any bid. They can’t buy all the top players.”

But exactly how big is the transfer budget? For obvious commercial reasons, the club has not divulged how much money it has, but you would expect a considerable surplus to be available from playing in a 60,000 sold-out stadium with some of the highest ticket prices in the world, especially when the club’s wages to turnover ratio is among the lowest around. The newspapers certainly appear to be completely confused. The Daily Telegraph announced this week that “Wenger gets £18m war chest”, though did not bother to explain how they arrived at this figure in the accompanying article. The Daily Star typically went big with “Arsene Wenger’s £60m spree”, while the Sunday Times was more oblique, “If Wenger wants to sign two £20m players on £80,000 per week this summer, he has the means to do so”. Even John Cross at the Mirror, normally so authoritative on all Arsenal matters, seems unsure, saying that “the club has £50m plus to spend” last October, only to reduce this to a “£30m plus budget” this month.

"Time to open the cheque book"

So, let’s take a look at the accounts to see if we can work it out, as the Beatles once said. The starting point is an impressive cash balance of £101m, but that includes £22m which must be maintained on deposit as security that future payments of interest and principal can be made to bond lenders, leaving £79m. Much of this will have come from season ticket money paid in advance, which will be needed to cover operating costs in the second half of the accounting year. As we do not know when expenses are incurred (or other income is received), we cannot say for sure how much cash is required for this. Your guess is as good as mine, so let’s just take the estimate of £35m from the esteemed Arsenal Supporters’ Trust, which would leave the club with net cash of £44m - still pretty good by most standards.

Half of this came from last summer’s profitable player trading. The annual report boasts “all proceeds from player sale transactions are made available to Arsene Wenger for re-investment back into the development of the team”. This is reinforced by the terms of the stadium financing deal, which states that 70% of all net sale proceeds must be used on buying players or placed into a ring-fenced Transfer Proceeds Account (TPA). This protects lenders by ensuring that the club continues to invest in its core asset, i.e. the playing squad. The sales of Emmanuel Adebayor (£25m) and Kolo Toure (£16m) to Manchester City less the purchase of Thomas Vermaelen (£10m) from Ajax produced a net surplus of £31m, so £22m went into the TPA.

"Pointing the way forward"

Importantly, this fund can also be used to improve players’ contracts and this has become key to Wenger’s approach to investing in the squad. Most fans probably do not appreciate that the manager controls a budget covering both transfers and wages, so just because money is available to him does not necessarily mean that he will use it to purchase new players. Instead, he can allocate cash to increase the wages of the existing squad, which is a route he has clearly followed. The interim accounts highlighted an £8.6m rise in player wages, despite the departure of Adebayor and Toure, who were on very high salaries. This reflected the re-signing of 17 first-team players on long-term contracts, which the chairman described as an “investment in a very talented group of players” and as the “best means of protecting the value of one of our most important assets”.

That may well be true, but it implies an annual wage bill of £120m, which is admittedly £30m less than Chelsea, but is now over 50% of turnover. Although that’s lower than most other clubs, you would not really want to push it any higher, even though there will be pressure to do so for a number of reasons. This month’s increase in the top income tax bracket from 40% to 50% has compounded the currency effect of Sterling’s weakness against the Euro, making England a less attractive proposition for foreign players, which can only be compensated by increasing gross salaries. At the very highest echelons, the market might also continue to be artificially inflated by the presence of extremely wealthy benefactors like Roman Abramovich and Sheikh Mansour, not to mention the Spanish giants Real Madrid and Barcelona.

"Money talks"

Hence, the so-called “golden handcuffs” deal to keep Cesc Fabregas away from the Catalans’ clutches, which not only increased his salary from £80,000 to £110,000 a week, but actually back-dated it for two years, resulting in a “signing-on” fee of £3m. It is strongly rumoured that Wenger’s first addition to the squad this summer will be Moroccan forward Marouane Chamakh from Bordeaux. This is presented as a free transfer, but he will reportedly be on a five-year deal worth £50,000 a week, which is a £12.5m commitment. See how important wages are to the overall cost of buying a player? A straightforward point, but one that Harry Redknapp did not seem to grasp at “pay up” Pompey.

What might be worth considering is whether the allocation of the wage bill is the right one, as much of it is currently given to younger players, who earn more at Arsenal than other clubs. In one sense, this is a shrewd policy, as it protects the players’ value in terms of future transfer fees, but it does mean that there is less money available to improve the first team squad. If the balance were fine-tuned, this could facilitate the purchase of the players who would make the difference between challenging for and winning trophies.

From a purely financial perspective, it is difficult to criticise Arsenal’s transfer strategy, as player trading has proved to be a very profitable activity in recent years. In the four seasons since the club moved to the Emirates, their net transfer spend has been a negative £35m. As a comparison, the net spend at their North London rivals Tottenham was £78m, even after the big money sales of Dimitar Berbatov and Robbie Keane, which is an incredible £113m more. Of course, any sales this summer would increase Wenger’s transfer pot and there has been media speculation about some departures, such as Eduardo to Lyon for £8m and Tomas Rosicky back to the Bundesliga for a similar sum. However, one potential barrier to clearing out some of the dead wood is the relatively high wages paid to the likes of Almunia, Eboue, Diaby and Denilson. Which other clubs would be willing to match their salaries?

"All in the past?"

On the other side of the coin, the club has provided £9m for “probable” additional transfer fees payable to other clubs after existing players make a certain number of appearances. It is not clear exactly when these payments will be made, but the prudent approach would be to deduct this from the available cash. On top of that, there are another £11m contingent liabilities for similar performance-related clauses, though these payments are considered less likely.

The really good news in the last set of accounts came from the property side. Although there had been considerable uncertainty arising from the market downturn, Peter Hill-Wood confidently announced, “It is clear that the next couple of years will see our property activities deliver excess cash”, while Ivan Gazidis confirmed, “We will soon be delivering a profit back into the football side of the Group”.

At the time the interims were published, 524 of the 655 private apartments at Highbury Square had been sold and recent reports indicate that there is only a limited number still available. We do not know how much money they sold for, but we can estimate the value of the 131 remaining apartments as between a conservative £33m (using the on-line starting price of £250k) and £54m (based on the average price of sales to date of £414k), which would produce net proceeds of £20m to £41m after clearing the outstanding debt of £13m (at the time the accounts were published). It’s a bit rough and ready, but if we take the mid-point for our calculations, that would produce £30m, though we do not know when the money will be given to Wenger. As Hill-Wood said, “This is very good news, although I would not want to speculate on the exact quantum or timing of this.”

"Welcome to Highbury"

Furthermore, the club’s other three property assets (Queensland Road market housing, Hornsey Road and Holloway Road) are now free of debt following the sale of Queensland Road social housing, so any future sales here represent pure profit. I have no idea what that could be worth, but let’s say £15-20m. The reason that I have guessed those figures is that it would result in total once-off property gains of £45-50m, which is in line with the £45m estimate from the Arsenal Supporters’ Trust and the £50m “surplus from sales” expected by the Times. Everyone seems to think that this money will be produced “over the next two years”, so it is far from certain that it will be on tap in the next transfer window. While we are being cavalier, let’s assume that half of the Highbury Square money is available now, leaving Queensland Road as future music, which would give Arsene another £15m now.

Given that Arsenal made a £5m profit from the core football business in the last six months, having stripped out player trading and amortisation, we could potentially add this to the transfer budget, but let’s be conservative and leave that untouched, so it can be used to cover other costs.

After all that, how big is Arsenal’s transfer budget? Well, we start with £44m cash, having allocated £22m to the security deposit for lenders and deducted £35m for second-half running costs, and then should reserve £9m for probable additional transfer fees, leaving us with £35m net cash. To that, we could add the estimated £15m from property development, giving us a grand total (drum roll) of a nice, round £50m.

"If we build it, they will come"

Even if that figure is not completely accurate, there is definitely a lot of cash available. It is equally clear that Wenger will have additional funds next year as well from a combination of solid football profits plus the remaining property development. However, if the club wishes to maintain a similar level of transfer funding beyond that, it will have to go down the old-fashioned route of increasing revenue (or cutting costs). Is that feasible?

The most obvious potential for revenue growth is in the commercial area, where Arsenal’s income lags way behind their peers, according to the Deloittes Football Money League 2010. Arsenal’s commercial revenue of £48m is much lower than the other teams in the so-called “Big Four” (Manchester United £70m, Liverpool £68m and Chelsea £53m). Understandably, Arsenal tied themselves into long-term deals with Emirates (stadium naming rights until 2021, shirt sponsorship until 2014) in order to provide security for the stadium financing, but recent deals by other clubs highlight the size of the opportunity, which is probably worth another £20m a year.

Gazidis is well aware of this and has recently restructured and strengthened his commercial team to explore new partners and overseas markets in order to “unlock value” (in his terms), though the thorny issue of more lucrative pre-season tours to America or Asia is on the back-burner until the club has a clear strategy for these regions. Arsenal’s transfer activities are also relevant to this area, as a new star would generate more shirt sales à la Ronaldo, Messi, Torres and Rooney.

"Gazidis unlocking value"

Other revenue streams are relatively fixed, though we know that broadcasting income will rise by £7.5m a year following the new Premier League deal for overseas rights. It is also difficult to see how match day revenue could be increased, given that Arsenal’s ticket prices are already among the highest in Europe, and there are some slightly worrying signs that demand at the higher end is not as strong as it has been. This is important, as the 9,000 premium seats generate approximately 35% of match day revenue. This may well have resulted in pressure on the manager from the board to buy some established stars, in order to improve the team’s chances of success, thus reducing the risk of a drop in crowds.

How about a spot of cost cutting? There certainly seems to be scope for some judicious efficiencies, as the annual costs of £55m for “other operating charges”, i.e. excluding salaries and amortisation, is actually higher than the total costs at seven Premier League clubs. Unfortunately, the club does not provide much detail for these costs, but they must include items like stadium operating costs, travel and training. What we can see is that these costs represent 25% of football turnover, which seems on the high side to me.

Hang on a minute, don’t Arsenal have a huge amount of debt to pay off? Yes and no. The astonishing advances on property sales have enabled the club to reduce net debt by circa £160m in the last twelve months to around £175m with the property developments now being essentially debt-free. This represents gross debt of £275m less £100m cash with the remaining debt being for the Emirates stadium, via a mixture of fixed rate and floating rate bonds that are due for final repayment in 2031. Total annual cost to service these loans is £20m (£15m interest and £5m principal reductions). It’s not clear whether it would be possible for Arsenal to pay off this debt early in order to reduce the interest charges, but my guess is that they are in no hurry to do that, as Gazidis has argued that not all debt is bad, “The debt that we’re left with is what I would call ‘healthy debt’ – it’s long term, low rates, very affordable for the club, and it’s effectively a mortgage on our stadium, which generates revenue.”

"Money spinner"

You might therefore conclude that all the funds will be invested in the team, but Peter Hill-Wood struck a slightly contrary note (not for the first time), “In addition to investing in the team, I think we will examine investment in club projects and infrastructure … into the next phase of growth.” Not sure what that might mean, but it inspires visions of adding a new tier to the Emirates like the San Siro before the 1990 World Cup – though somehow I doubt it.

Those fans that would prefer to see the club put money into the “Arsenalisation” of the team rather than the stadium, would be comforted by Gazidis’ comments after the results, “We have delivered a profit before tax of £35m for the first half of the year, but it’s important to note that this isn’t our primary objective. The reason we run a responsible, profitable and self-sustaining business is so that we can deliver success to the club and invest in the club and ultimately deliver success on the pitch.” While Arsene Wenger believes he “would not be doing his job well if the club lost money”, he is at pains to emphasise that “the sporting side is always the most important thing.”

There is no doubt that the move to a new stadium has limited Arsenal’s transfer budget over the past few years, which Wenger finally admitted this week, “The construction of the Emirates Stadium meant that for many years we could not spend a lot of money. Our financial situation has greatly improved. We are finally able to buy the players we think we need”. This is a much more transparent response than the previous obfuscation, but there is still a suspicion that Wenger would prefer to build rather than buy, so much of the low spending was out of choice.

"How much?"

Every summer, Wenger has repeated the mantra: “We are not short of money. I am not scared to spend money. We have a squad that is good enough to compete. I will spend for a player that we need.” Even though he clearly has money this year, Wenger seemed to be preparing supporters for another summer of low spending, when he told the club’s magazine, “I feel we have made huge steps forward this year compared to last year”, while also pointing out the dangerous consequences for the club’s wage policy of buying a top star on top dollar. Last summer, he also showed his hand when discussing Real Madrid’s galactico policy, “In my opinion, to recruit more than three new players in a transfer window, as Real plan, is taking a technical risk.” Wenger may feel vindicated after the lack of success for the Spaniards (and indeed Manchester City) this year, but critics would point to the improvement shown in the Champions League by Bayern Munich and Lyon, who were among the biggest spenders last summer.

There are two other factors that might influence Arsenal’s transfer targets. First, injuries have been a major dynamic this season with key players being lost at different stages (Robin Van Persie, Cesc Fabregas and Alex Song in particular) and the squad suffering a barely credible seven fractures. If they all return hale and hearty, that will be like making several “new signings”. Second, the Premier League has introduced a new home-grown player rule, which means that all clubs must register a squad with a limit of 25 players of which eight must be aged 21 or under and qualify as home-grown. The consensus seems to be that Arsenal are well placed to satisfy these quotas, but it might influence the club’s manoeuvres in the transfer market.

"Mind over matter"

Whatever signings Arsenal make, we can expect them reasonably soon, if you believe Wenger’s comments to the club magazine, “I have definite transfer targets and have been talking to people, but I will not tell you who. I believe the earlier you settle your teams the better it is and the less anxiety you have.” While some might cynically note that this announcement neatly coincides with season ticket renewals, there is a precedent for this approach, as he signed Rosicky before his goal scoring feats for the Czech Republic in Germany (and before his price was artificially inflated). It should also be noted that Wenger is going to South Africa to cover the World Cup for French television.

One final factor is that Arsene Wenger’s own contract expires next summer. The chairman has reiterated his support for the enigmatic Frenchman, “We want him to stay for as long as he wants, and we hope that will be for a considerable time yet”. Wenger’s sense of moral decency would not allow him to go on a spending spree if he felt that he was likely to leave, as a new manager will usually want to bring in his own players. From this perspective, the arrival of several new players would be doubly pleasing to the majority of Arsenal fans.

However, a few supporters are getting restless at the lack of trophies and reluctance to spend big in the transfer market, because Wenger’s reign has been like the proverbial “game of two halves”, winning three Premier League titles and four FA Cups in his first nine years, followed by nothing in the last five years. He is an outstanding manager, probably the best that Arsenal has ever had, but he might need to modify his transfer policy to ensure that he goes out with a bang.

Thursday, April 22, 2010

When Will Chelsea Reach Their Target?

While Chelsea continue to battle Manchester United for the Premier League title that apparently nobody wants to win this season, the club's accounts for the twelve months to June 2009 were submitted to Companies House last week. Not a thrilling read, you might think, and you would be right, but two key points emerged in the detailed notes: first, Chelsea’s wage bill was the highest ever reported by a British football club; second, the players earning these salaries are, in fact, worth a lot less than the year before.

This once again called into question whether Chelsea would ever achieve their frequently stated target of breaking even on their financials. Fans with a good memory will remember that this was part of former chief executive Peter Kenyon’s five-year plan, but even his initial confidence appeared to weaken along the journey, “The 2010 break-even is ambitious. I don’t think it’s something we are postponing, but it’s always been ambitious. We are determined to meet it or get as close as we can.” Of course, this has not overly mattered at Chelsea, given the generosity of their wealthy owner, Roman Abramovich, but it could become a more pressing issue, as the Russian has supposedly started to clamp down on the club’s largesse.

"Man with a plan"

Current chief executive, Ron Gourlay, reiterated the target, though quietly dropped the previous deadline, “It is still our aim to be self-sufficient and we will achieve this by increasing our revenues as we continue to leverage off our brand. We are reducing our costs by controlling expenses, including salaries and wages.” Nothing much wrong with that (apart from the hideous marketing-speak about “leveraging the brand”) - except for a couple of minor caveats. First, it’s all well and good talking about increasing revenue, but it sounds a bit hollow after the club’s revenue has just declined. Also, it’s a bit rich to start talking about controlling salaries after they have reached £150m or, put another way, nearly 25% higher than the next highest wage bill in the Premier League (at Manchester United).

So exactly how close were Chelsea to reaching the promised land of zero profit? The £44.4m loss in the 2009 results was somehow presented as a triumph, purely because it was £21.3m smaller than the prior year. OK, the loss is lower, but it’s still a thumping great loss. Only Manchester City recorded worse figures in 2009 in their first year of (ironically) “doing a Chelsea”. The club’s press release described the revenue as “stable”, which actually meant that it fell £6.7m from £213.1m to 206.4m, reflecting the front-loaded nature of a sponsorship contract. This decrease is attributed to the “economic climate”, but should be a cause of concern when the other members of the Big Four all managed to improve their revenue, especially after a fairly successful season (Premier League runners-up, Champions League semi-finalists and FA Cup winners).

"The only way is up"

To be fair, operating expenses of £263.7m were also down £10.4m, but you could make a case that most of the £21.3m improvement in profits (a.k.a. reduction in losses) was due to non-core activities: profit on player sales was £6.4m higher; amortisation was £8.3m lower, reflecting a slow-down in player purchases; and termination payments to managers and coaches were £10.5m smaller. These severance expenses are described as “exceptional items” in the accounts, suggesting that the underlying loss is much lower, but it’s actually pretty much business as usual for Chelsea, when you see that they have made such payments in three of the last five years (£25.5m in 2005, £23.1m in 2008 and £12.6m in 2009), paying £61.2m to rid themselves of a succession of “failed” managers: Claudio Ranieri, Jose Mourinho, Avram Grant and Luiz Felipe Scolari. That’s a staggering amount, especially if you consider how successful Mourinho and Ranieri have been since leaving Stamford Bridge.

In the trading world, technical analysts are fond of the expression, “the trend is your friend”, and the club’s management are keen to point to losses reducing for four years in a row. Good stuff, but everything’s relative, and the starting point was the record deficit of £140m in 2005. Yes, the losses might be on a downward trend, but they are still enormous by almost anyone else’s standards. Back in 2005, Peter Kenyon talked tough, “Two years ago we were seen as streets paced with gold. That is over. Chelsea is now being run properly. The club is being run as a business.” Four years later, he repeated the message, “This is the fifth set of financial accounts since the takeover and Chelsea has made huge progress during that period as a football club and a business.”

Hmmm. I’m not sure that I would describe the progress as “huge”: in the period described by Kenyon, the losses did fall, but only from £87.9m in 2004 to £65.7m in 2008. Big deal. In fact, much of the improvement over the years has been due to a revised approach to buying and selling players. As Kenyon said, “We have consistently reduced our net transfer spend over the last five years and will continue this trend.” Following the record shortfall in 2005, losses have now reduced by £95.6m (from £140.0m to £44.4m), but almost all of this (£74m, nearly 80%) has come from the transfer market: profit on player sales is £40.4m higher, while amortisation on purchased players is £33.6m lower. Another £12.9m of the reduction is simply because of lower termination payments (£12.6m compared to £25.5m). In other words, only £8.7m of the improvement has come from the underlying business. In an era when television money has significantly increased, that’s an unconvincing performance. Another way of looking at this is to say the revenue growth of £57m has been as near as damn swallowed up by matching cost growth of £53m, leaving a net improvement of just £4m.

The club was also keen to emphasise the improvement in cash flow in the press release accompanying the 2009 accounts, “Disciplined management of capital expenditure has reduced the cash spend from £107.4m down to £16.9m”, largely due to the completion of major projects such as the training centre at Cobham. However, like the profit and loss account, the song remains the same: cash flow might be better, but it is still negative, as it has been for every year of the Abramovich reign. This is, of course, before “financing”, i.e. interest-free loans from the owner. Interestingly, the net cash outflow from operating activities of £13.1m 2009 is exactly the same as it was in 2004 – no progress at all.

"Shining example"

But it’s the wage bill that has hit the headlines for all the wrong reasons. As per Chelsea FC plc’s accounts, total payroll costs (excluding termination payments) increased by £4.5m from £148.5m to £153.0m and may be even higher this year following new deals for the likes of John Terry, Frank Lampard, Petr Cech and Michael Essien. Chelsea had seven players in the recent list of the top 50 highest football salaries by Portuguese agency Futebol Finance, which is more than Real Madrid and big-spending Manchester City and only behind Barcelona. Chelsea started as they meant to go on when the first wage bill of the Abramovich era in 2003-4 of £115.6m was more than twice as much as the year before £55.9m. At the time, Kenyon said that he would set some “aggressive” targets for reducing the payroll, but it’s actually increased since then by more than 30%.

This has resulted in a wages to turnover ratio of 74%, which is admittedly better than a lot of teams in the Premier League, but is worse than Chelsea’s stated target of 55% and is a long way behind Manchester United and Arsenal (excluding property development) with 44% and 46% respectively. So the players are well paid at Chelsea, but the directors don’t do too badly either or at least one director, whose remuneration was £2m in 2009. The accounts do not specify who this is, but it’s presumably Kenyon, given that the same amount was earned in 2008.

At least money can’t buy success. No, strike that, as the current Premier League table shows that actually it can. As we speak, the top three positions are filled by the three teams with the largest wage bills – in exactly the same order. Chelsea pay the most and lead the table, followed by Manchester United with the second largest payroll and then Arsenal whose salaries are third highest. In fact, the top seven places in the Premier League are occupied by the first six teams in the “wages league” plus Tottenham (who are 8th). It appears that there is an almost perfect correlation between wages and league success (at least, this season).

"Can Buy Me Love"

Arsene Wenger has described this as “half cheating”, explaining that, “Professional football is about winning and balancing the budget. I’ve always pleaded for financial fair play.” He continued, “What is not normal is not our wages bill, but their (Chelsea’s) wages bill. That should not be allowed.” It’s a fair point, though critics might argue that it’s a bit steep coming from Arsenal, whose annualised wage bill is now running at around £120m, which is not that far below Chelsea and a long way ahead of most other clubs. However, Wenger’s argument is valid from the perspective of the wages to turnover ratio, namely that clubs should not be permitted to subsidise inflated wage bills by injections from owners, but should cut their cloth according to their revenue.

To Chelsea’s credit, they have already embraced a more prudent approach. Abramovich’s arrival was characterised by a massive spending spree, the likes of which the English game had never seen, but he has been far more frugal in recent seasons. In his first three years at the club, he splashed out almost £400m on buying new players (£170m in the first year alone, when he essentially purchased an entire new team – plus substitutes), but has only spent about a quarter of that (£110m) in the last three years. The last big splurge came back in 2006, including the likes of Ashley Cole, Salomon Kalou and the ultimate vanity purchase Andriy Shevchenko. The only “big” names to arrive last summer were Yuri Zhirkov, Danny Sturridge and Ross Turnbull (on a free).

The new, more cautious strategy has also been witnessed on the other side of the trade: in the first three years, Chelsea made a £6m loss on player sales (partly due to writing-off Adrian Mutu’s contract after his drug test), but have made a £60m profit in the last three years, mainly thanks to the sale of Arjen Robben to Real Madrid and three players to Manchester City (Wayne Bridge, Shaun Wright-Phillips and Tal Ben Haim).

"Praying for money?"

Manager, Carlo Ancelotti, has said that significant funds are available to him if required, but I think that the gentleman “doth protest too much”. In the January transfer window, he said, “Together we take the decision to maintain this squad, because we think this is a good squad. It’s not a question of money. Absolutely not. If it’s necessary to buy players, then we can do it”. Only last week, he was still on message, as he did not see any need for a summer spending spree, “I don’t think it’s necessary for us to spend a lot of money”. He is beginning to sound a lot like Arsene Wenger (“there is money to spend, but at the moment I am very happy with the squad I have”) and Alex Ferguson (“the money’s there if I want to buy someone”).

If a special player like Sergio Aguero or Kaka became available, it is possible that Abramovich would stump up the cash to get him, but it has become evident that the owner is concerned about the size of the club’s wage bill, most obviously with the protracted contract negotiations with the aging Michael Ballack and injury-prone Joe Cole. They could well be allowed to leave the club on free transfers, unless they accept drastically reduced terms.

This revised strategy has been reflected in the players’ valuations. In the balance sheet, intangible assets (basically net book value of the players) have decreased by £65.8m from £143.6m to £77.8m in just twelve months. The accounting treatment might be highly theoretical, but even an “independent” assessment by officers of Chelsea FC has slashed the valuation by £40m from £287m to £247m, based on estimates of what could be realised in the transfer market.

"Ballack gets shirty"

This explains Abramovich’s concerns, as he has been hit by the double whammy of a squad diminishing in value while continuing to command the highest salaries in the country. In terms of cashing in on the players, most of them are well past their sell by date with six players in their thirties when next season starts: Ballack, Drogba, Carvalho, Lampard, Anelka and Malouda (Terry and Ashley Cole are just short at 29). Even though the team may well win the Premier League, this is a team that needs rejuvenation if they are to deliver the Champions League success that Abramovich craves. What is certain is that this will not be funded by player sales – just look at Shevchenko, bought from Milan for £30m in 2006, moved to Dynamo Kiev on a free in 2009. It is not easy for any club to replace many key players at the same time, as Arsenal fans well know, following the break-up of the “Invincibles”.

One route that the Gunners have followed is to develop youth players that can break into the first team, but this has proved difficult for Chelsea to emulate. Frank Arnesen’s academy has hardly been a glittering success and the Dane was strongly criticised by Mourinho for not producing a single player that regularly started for the first eleven since his arrival in 2005. This remark might have been down to politicking by the notorious “Portugeezer”, but there was a tacit admission of failure when over half of the club’s worldwide scouting network was sacked. And that’s without mentioning the “tapping up” accusations.

"Wake-up call"

As we have already seen, the squad rebuilding cannot be financed from profits, for the very good reason that there aren’t any, so it will once again come down to the willingness of the owner to open his wallet. As that man Wenger said, “The only difference is that Abramovich can go out tomorrow and change ten players, because he has the financial potential to do it. But if Chelsea were run like any other club, they couldn’t do it.” Leaving aside the fact that Manchester City can now also do the same, Wenger is right to stress the importance of Abramovich to Chelsea’s fortunes.

The question is whether the Russian is willing to inject even more cash into Chelsea. After all, his personal spending on the club since he took over in 2003 is now over £700m. In the first year, Kenyon said that Abramovich’s purchase was “a serious investment with a long-term business plan”, but the oligarch has had to put his hand in his pocket every year since. Accusations that Abramovich had “lost his interest and enthusiasm” first emerged in 2007 and Mourinho was just the person to rub salt into the wounds after his Inter team eliminated Chelsea in this season’s Champions League, “He is not the same person. Probably he thought it would be easy when he arrived in football.” Not unnaturally, Carlo Ancelotti refuted this, “Roman is very interested, for sure, in his team. He likes football, Chelsea, the players and he wants to know everything – about injuries, the balance of the team, tactics.”

"You don't know what you're doing"

The reality is that Abramovich is still there. Perhaps the best example of his support is that he has converted his loans into equity, effectively making the club free of debt. Last year he halved the club’s debt with a £370m conversion and followed that up with another Christmas present in 2009 by doing the same for the outstanding £340m. When asked whether Abramovich would ever ask for his loans to be repaid in 2007, Peter Kenyon had replied, “As chief executive, I want to pay him back, because that would show we are running this club as a real proper sustainable business.” Although the Russian’s grand gesture made a mockery of these comments, a grateful Chelsea chairman, Bruce Buck, said, “There should now be no doubt as to the owner’s commitment to the club.” This had already been amply demonstrated by the interest-free nature of his loans, meaning that Chelsea paid less than £1m interest last year, compared to the eye-watering £68m at Manchester United, £37m at Liverpool and £20m at Arsenal. That’s what I believe is called a competitive advantage.

Some have commented that the debt conversion would make it easier for Abramovich to sell the club, as an investor would no longer be acquiring a mountain of debt, but that obviously does not imply that the club is on the market. At first glance, the timing does seem rather strange, as it doesn’t really make the club any more secure, unless you believe that Abramovich was thinking of calling in the loans at some stage.

"Good brand values?"

Bruce Buck provided a more likely reason for reducing the club’s debt, which was “to comply with any regulations on debt levels which are being discussed by the football community”. This was his oblique reference to UEFA’s Financial Fair Play initiative, which will come into force for all clubs involved in European competitions from 2012-13. However, it is far from clear whether Abramovich’s actions will be sufficient, as UEFA want to ensure that all clubs break-even and be self-supporting. They have explained that their intention “is to stop clubs making losses consistently, and having a backer to pay them off. That way of funding clubs, from outside owners, inflates players' wages, and too often an owner finds he cannot fund the losses any more and the club is in crisis, (which) is not sustainable for football”.

Therefore, Chelsea do need to explore ways of hitting the elusive break-even target and one route is to increase revenue. The long-term objective was always to turn Chelsea into a global brand (like the franchise that is known as Manchester United). There has been some success in increasing sponsorship revenue, mainly as a result of switching shirt supplier from Umbro to Adidas, but Chelsea’s commercial revenue of £52.8m still lags behind United at £70.0m and £67.7m at Liverpool. Ron Gourlay has spoken about selling naming rights for Stamford Bridge, which might generate an additional £10m a year. There’s obviously room for growth here, but the off-pitch scandals involving “JT” and “Cashley” Cole don’t exactly promote the Chelsea brand.

"Bridge of Sighs"

The club’s capacity to make more match day revenue is constrained by, er, their capacity of 42,000 at Stamford Bridge, which is considerably lower than Old Trafford (76,000) and the Emirates (60,000). Nevertheless, they do get a lot of bang for their buck with revenue of £74.5m, which is much higher than Liverpool’s match day revenue of £42.5m, even though Anfield’s capacity is actually larger with 45,000. They have held prices steady for a couple of seasons, but apparently maximise the corporate revenue. However, their only realistic hope of matching the £100m+ earned by Manchester United and Arsenal would be to move to a larger stadium and that appears to be off the agenda for the moment, as no feasible alternative site has ever been realistically identified.

Broadcasting revenue is already pretty good at £79.1m, second only to Manchester United in England, but may be a bit lower this year after the earlier exit in the Champions League. In line with other teams in the Premier League, Chelsea will benefit from the new agreement on overseas rights, which will deliver an extra £7.5m per annum for the next three years. Apart from this revenue stream (and even this may be endangered in future years by Ofcom’s ruling that Sky should charge less for their sports packages), it is not easy to see how Chelsea can grow their revenue sufficiently to hit break-even. As Deloittes said in their annual review, “the club faces a significant challenge to regain a top five position in our Money League.”

"Still interested?"

Hence, the continued reliance on Roman Abramovich even now, despite Kenyon’s grand five-year plan to reduce dependency on the Russian. This cannot be a sound business model. Even chairman Bruce Buck had to admit, “No matter how much money the man has, and I don’t know how much, at some point he is not going to want to invest more money in the club.” Clearly, Chelsea’s benefactor is not short of a few bob. Last year, his fortune was reported to have declined by 40%, but he was still worth £7 billion according to the Sunday Times Rich List and he must have increased his net worth in 2010 following the stock market recovery. However, even the wealthiest businessman is not invulnerable and Abramovich is currently facing a £2 billion court claim from former business partner Boris Berezovsky. Although it is unlikely that Abramovich would ever abandon the club for financial motives, Chelsea would be in serious strife if he exited stage left – for whatever reason. At the very least they would have to find another source for their borrowing – and might even have to pay standard rates of interest.

So will Chelsea finally manage to break-even? I’m afraid that the answer has to be “yes” and “no”. If you look at the bottom-line loss of £44.4m in 2009, it looks improbable, but it is certainly possible if you consider the narrow profit definition used by Peter Kenyon, “We have set ourselves ambitious targets to be EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortisation) neutral on June 30 2010.” On this basis, Chelsea’s 2009 loss was only £11.4m, so they are in with a fighting chance, though it does bring to mind the old saying about moving the goal posts.

Wednesday, April 14, 2010

Why Has Nobody Bought Everton?

While the focus on Merseyside has been on Liverpool, both in terms of their likely failure to qualify for the Champions League and the financial doom and gloom arising from the Hicks and Gillett regime, people seem to have overlooked what is happening at Goodison Park. Not only have Everton recovered very well after a dreadful start to the season, including a memorable dismantling of Manchester United, but they also have issues of their own off the pitch. Their financial problems may not be quite so spectacular, but the fact is that Everton’s business model is bust. Their strategy, for want of a better word, appears to be to run the business at a loss every year in a gamble to achieve success on the pitch and to fund it by steadily increasing their debt. Every now and then, they might accidentally make a profit, but only at the price of selling one of their prize assets, the best/worst example being Wayne Rooney five years ago. From a commercial perspective, it is difficult to see how the club will prosper in the future – unless they find a wealthy benefactor.

That is why leading theatrical producer, “True BlueBill Kenwright, who has been Everton chairman since 2004, formally put the club up for sale in 2008, when he appointed Keith Harris of the investment bank Seymour Pierce as broker, but Everton has effectively been on the market for many years. The reasons are obvious, but Kenwright explained why his “kind of chairmanship” no longer has a future in the rich men’s playground known as the Premier League: “I am a pauper when it comes to other chairman. I want this club to have a billionaire owner, but it’s not me and I apologise it’s not me. Everyone knows this football club needs investment. If I can sell it, it will be sold tomorrow”. If this had not been evident before, it became abundantly clear with the arrival of Sheikh Mansour’s billions at Manchester City, which has starkly highlighted the limited budget available to David Moyes.

"Here comes the sun"

So why has nobody bought Everton? After all, this is a club with a fine tradition, having been winners of the old First Division nine times, the FA Cup (when it meant something) five times and the European Cup-Winners Cup once in 1985. As the song goes, “if you know your history”, but it’s not all old news, as Everton were the last team to break the Big Four stranglehold on Champions League places in 2005, came fifth in the Premiership for the last two seasons and were finalists in the FA Cup only last year. In David Moyes, they also have a very good manager, who Kenwright described as “the most important figure at the club”. It is certainly true that Moyes is responsible for taking the club to the upper echelons of the league, but paradoxically his ability could be considered a strength and weakness, as there is always a risk that he could leave for pastures new. Recently, he appeared to break ranks for the first time, “It’s getting harder to keep up with the Joneses. I want to be involved in a football club which makes progress”.

Even the man tasked with selling the club, Keith Harris, admitted that Everton were not football’s most attractive prospect, “The demographics of Liverpool as a city are not hugely compelling. It is not a very wealthy city. Everton share the city with another club, which arguably has been in the vanguard for the last decade, and they both have a stadium to build. So the economics need a lot of looking at”. They have a loyal, but parochial support, with no identifiable image or brand, which was not helped by the UEFA ban on English clubs in the 80s, which prevented Everton from taking their rightful place in the European Cup.

"I'm reviewing the situation"

In fact, Harris confessed that he was making “no progress at all”, exacerbated by the credit crunch, “It has never been more difficult to find buyers. It's no longer a question of price negotiation - it's should we? People are wondering if now is the time to spend”. Kenwright agreed, “We aren't living in a normal world. I am talking to people every week, but in the last few months it's been 'We want a deal done in the next week' and then you literally don't hear from them again. There's just no money”. That may be true, but it does not take long for hard-nosed financial investors to appreciate that this club simply does not make money. Move along, nothing to see here. They walk away even more quickly once they have noticed the club’s growing debt and realise that they would have to fund the building of a larger stadium.

Ah, the new stadium. Everton had proposed building a new 50,000 capacity ground as part of a retail park in Kirkby, on the outskirts of Liverpool, but in November the government rejected their planning application. This was a real blow to the club, as they had been putting all their energies into this scheme for the last three years. Former chief executive Keith Wyness had gone so far as to describe it as “the deal of the century”, because Tesco were going to pay £52m of the construction costs, leaving Everton to find “only” £78m. Wyness argued that much of this money would have been raised by selling Goodison Park and Bellefield, the club’s former training ground, and charging for naming rights at the new stadium. Any debt would be “easily” serviced from the increased earnings at the larger ground. On the face of it, this rejection seems disastrous, as the supporters have been told, “There is no Plan B”, but now “the book is closed” on Kirkby. Current chief executive Robert Elstone had made this very plain, “If this club is going to compete at the top end of the Premier League, we need a favourable decision”.

"Brave new world?"

This is the third time in 13 years that a proposal for a new ground has come to nothing, but this rebuff might just be a blessing in disguise. Many fans never warmed to the idea of moving to Kirkby, which prompted the formation of the “Keep Everton In Our City” (KEIOC) campaign. Their opposition was explained thus, “This was a location issue. This stadium would have been nine miles outside the city centre, further from a city centre than any other Premier League ground”. Their concerns were shared by Liverpool Council, who would also prefer a central site. A better alternative for the supporters was the proposal to build a new stadium on Liverpool’s prestigious King’s Dock, but that scheme was scrapped when the club failed to raise sufficient money.

Which brings us to the question of how exactly Everton would have funded Kirkby. We’re none the wiser after the planning inquiry, as the club refused to explain how they would meet the construction costs on the grounds (sic) of “commercial sensitivity”. The sale of Goodison is unlikely to make “loadsamoney”, as it is situated in a far from salubrious area with boarded-up terraced houses, while their hopes of redeveloping their former training ground for housing were dashed when the application for planning permission was refused (there’s a trend here). The idea of securing big bucks for naming rights also appears a little far-fetched when you consider the low money paid for shirt sponsorship. If by some miracle the club did manage to cobble together the funds, all it would do is further inhibit their capability to spend money on new players.

"My hands are tied"

On the other hand, a brand new, state of the art stadium (or even planning permission) should “improve the club’s financial position, attract investment and provide more money for the manager”. According to a club spokesman, “Any club which can boast a stadium which is modern, fit for purpose and capable of expansion does represent a more attractive proposition to potential investors”. Indeed, the club’s second largest shareholder, Robert Earl, the Planet Hollywood entrepreneur, said that he would not put further money in until the club had moved to a new stadium. Kenwright explained the economic facts (as Rafa might say), “I don’t want to be the guy that takes the club away from Goodison Park. I would sooner stay here personally, but it is not an option financially”. In the same way that Arsenal had to leave Highbury for the Emirates, Everton need to relocate to a stadium with more commercial opportunities and higher match day revenue.

Something has to be done to boost the club’s revenue, as the profit and loss account looks simply awful. Last year, even when the club reported record turnover of £79.7m (an increase of £4.0m on the previous year) on the back of a pretty successful season, they still suffered a loss of £6.9m. This is nothing new under the sun, as Everton have only managed to record a profit once in the last seven years – and that was only due to Wayne Rooney’s big money transfer to Manchester United in 2005. Since “Wazza” was sacrificed, there have been £27.1m of cumulative losses (2006 - £10.8m, 2007 - £9.4m, 2008 break-even, 2009 - £6.9m). Although revenue has significantly increased over the years, thanks to the arrival of Sky television money, this has been matched by spiralling costs. In 1999 Everton reported a loss of £10.7m on turnover of just £25.6m, so in the last ten years revenue has risen by a remarkable £54.1m, but less impressively this has only produced a slightly smaller loss.

"From Hair to Eternity"

The main reason for the cost growth is player wages, which rose by 10.3% last year alone from £44.5m to £49.1m. This “significant investment in the playing squad” gave rise to a higher wages to turnover ratio of 62%, which is nowhere near the worst in the Premier League, but is far from comfortable, even if the club considers it “appropriate”. On top of the salary levels, headcount is also increasing from 210 to 226 with “players, training and management” rising from 80 to 86. As a small compensation, at least the director’s remuneration, presumably Kenwright’s, has reduced from the £450k average of the last three years to “only” 244k in 2009. However, costs have not been helped by wasting nearly £3m on fees incurred for the design and planning of the failed stadium bid (£1.5m in 2008 plus £1.3m in 2009).

The losses over the years would have been even higher if the club had not been selling players. Over the last five years. £40m has been contributed by what accountants call “profit on disposal of players’ registrations”. The impact was most obvious in 2005 when Rooney’s sale resulted in a net profit of £23.5m, but you can also see its importance in the last two years. The club just broke-even in 2008, thanks to £9.2m profit from player sales, but reported an overall loss of £6.9m in 2009, when the profit from player sales was much lower at £3.8m (principally from the sale of Andrew Johnson to Fulham). This bodes well for next year’s results, which will include the £22m sale of Joleon Lescott to Manchester City.

"Moyes has just been told his budget"

This has not stopped the club buying players and Everton have somehow found £84m in the last five years to improve the squad. This does not include £11.8m of contingent liabilities, which will be payable based on future appearances and loyalty bonuses, which would bring the total to nearly £100m. In the accounts, costs associated with buying a player are capitalised as intangible fixed assets and written-off over the length of the contract, as the assumption is that the player would have no value after his contract expires, since he could then leave on a “free”. As an example, John Heitinga was bought for £6m, so if we assume that was on a 4-year contract, £1.5m costs would be booked to the accounts in each of the next four years. Although costs of buying a player are not fully reflected in the accounts in the year of purchase, over time the amortisation costs can have a real impact, which is what has happened at Everton with these costs rising from £12.3m to £13.0m in 2009. That’s a lot in the context of a £6.9m loss.

Kenwright is quite open about this policy in the annual report, “Once again, every available penny was channelled towards the manager to facilitate the upgrading of the senior squad”. This could be seen in the period covered by the last accounts with the record £15m purchase of Marouane Fellaini. Since then, the bulk of the Lescott money has been spent on Sylvain Distin £5m, John Heitinga £6m and Diniyar Bilyaletdinov £9m, but the tap might be closed for a while, given Moyes’ remarks during the January transfer window, “We will be trying to get some players in January but they will probably all be loans. We won't be buying anyone, we don't have those finances”. That’s one of the problems: the only way that Everton have managed to buy these players is by taking on more debt, but Kenwright himself has admitted, “I can’t go on every year as I have been doing, borrowing for transfer funds for David Moyes”.

"No business like show business"

Net debt did actually increase slightly in 2009 from £36.8m to £37.9m, which is nothing compared to the £237m debt at Liverpool or £716m at Manchester United, but it is meaningful, as the club appears to have no way of paying it off. In July Kenwright admitted, “Our debt is a big debt and a worrying debt. It is manageable because of our performance on the field, but it is too much debt that every year is going to be added to”. The debt largely arises from a £30m 25-year loan arranged by Bear Sterns in 2002, which has the advantage of being long-term with a fixed interest rate of 7.79%, but has contributed towards a net interest charge of £4.1m last year (up from £3.9m). In fact, in return for the £30m loan, Everton will end up repaying £68m. The accounts also reveal one other obvious reason for the club’s need to borrow – they have no cash at bank. Nothing, nada, zilch. Not a surprise, given that the cash flow has been negative for the last four years: 2009 - £1.8m, 2008 - £10.9m, 2007 – 4.7m and 2006 - £5.3m. The last time that the cash flow was positive was 2005, due to, guess what, the Rooney sale.

To be fair, Everton control costs quite well, but their revenue lags way behind other major clubs. The 2009 turnover of £79.7m may have been a record for the Toffees, but it’s significantly lower than the Big Four (Manchester United £279m, Arsenal £224m, Chelsea £206m and Liverpool £185m). Fair enough, they benefit from the riches of the Champions League, but Everton are also a fair bit under their peers (Spurs £113m, Manchester City £87m and Aston Villa £84m). They’re even outperformed by Newcastle £86m – who play in the Championship. How can Everton hope to compete on their level of revenue?

Even where revenue has grown considerably, as with broadcasting increasing from £27m in 2007 to £49m in 2009, this has little to do with the club, being down to the collective Sky Premier League agreement. Everton has a huge dependency on television, more so than other clubs, with 61% of their total revenue coming from this stream, but it just about covers the wage bill. This will further rise in the next three years by at least £7.5m per annum, thanks to the recent agreement on overseas rights, but Everton would have to qualify for the Champions League to earn the really big money (another £25m). This is why we have a number of clubs building up debts in order to reach the heady heights of the top four – but they aren’t all going to get there …

Although the club promised to improve its commercial operations a few years ago, it remains feeble at £9.2m, up just £0.5m from the prior year. As a comparison, Spurs earn £29m commercial revenue. To be fair, the club outsourced its merchandising and catering operations in 2006 and its retail business to Kitbag in 2009, which mean that they receive a lower net income from subcontractors, but even so. Everton boast that their shirt sponsorship deal with Chang is the third longest running in the Premier League, but strangely do not mention where they stand in terms of revenue. It’s definitely a lot less than the deal Liverpool recently signed with Standard Chartered Bank – one promise that Christian Purslow actually has delivered on.

"The Story of the Blues"

But where Everton really fall down is match day revenue, which was only £21.9m last year, even though it rose 7%. It may be even lower next year, following the team’s early exit (4th round) from the FA Cup, though this may be offset by their progress in the Europa League. To place this into context, Manchester United and Arsenal both earn more than £100m from match day revenue, while even Liverpool, whose ground is not much larger than Everton’s, managed to gather £43m.

This is the reason why Everton must still look at other options for their ground. Plan B was always to remain at Goodison Park and refurbish their traditional home, but this really would be a case of making the best of a bad job. Limited by a capacity of only 40,000, which is effectively even lower, due the large number of seats with a restricted view, it also does not possess any quality corporate areas for money-spinning hospitality. The ground itself is hemmed in by Victorian housing (and a church) and supported by an inadequate road network. In short, there is no feasible way of transforming Goodison into a modern stadium.

Even if Kirkby had gone ahead, it would not have generated much additional revenue. A study performed by Deloittes on behalf of Everton estimated a paltry £6m extra a year and that was based on the club almost filling the 50,000 stadium every match. That would represent an appreciable increase from last season’s average attendance of 35,667 (down from 36,904 in 2008), so Everton cannot take for granted an increase in crowds, unlike, say, Tottenham, whose proposed new ground is partly justified by their waiting list of 23,000 for season tickets.

"Show me the money"

Others, including Liverpool Council and KEIOC, believe that an alternative location in the city centre can still be found. Although this would be expensive, the suggestion is that it could be financed by some sort of mortgaging scheme, e.g. selling seats for the next 25 years. The council has also indicated that it would favour a ground-sharing scheme, given the financial troubles of both Liverpool clubs. This has worked well on the continent for many years in Milan and Rome and more recently in the Allianz Arena in Munich, where the stadium glows red when Bayern play, and blue when it’s the turn of 1860. How appropriate. However, some worry that this would be detrimental to Everton’s brand, if they were perceived as the junior partners.

What other assets do Everton have? In short, not many. The balance sheet has been deteriorating for a long time with net assets of £18.5m in 1999 declining to net liabilities of £26.7m ten years later. The club takes great pains to emphasise the long-term nature of their loans, but the net current liabilities are also at a record high of £37.4m. Most of the club’s assets have been sold off (the training ground, the academy at Finch Farm and the Megastore), which also increases costs for higher rents, while Goodison’s value is declining. The only assets left are the players themselves with intangible assets now up to £39.4m. Nothing has been included in the accounts for home grown players, but the horrible truth is that any (financial) value would only be realised if the player were sold. What price a debt reducing, balance sheet strengthening sale of Jack Rodwell to Arsenal or Manchester United for £15m this summer?

"Say Hello, Wave Goodbye"

There appears to be no way out for Everton short of a wealthy patron buying the club, described by the Bundesliga chief executive as “the greater fool theory - some day a greater fool will come and buy the club”. At least, Everton have not sold out to leveraged buy-out vultures like the Glazers or a buffoon like Mike Ashley, but the club deserves somebody more financially astute than Kenwright, who unbelievably stated, “I do not understand why football clubs have such big debts, it is a mystery”. Indeed, some fans are growing suspicious of Kenwright’s numerous claims that he is looking for an investor (“Every name you see that has been out there looking for football clubs, we’ve spoken to them. We’ve had people in the Far East, America, Switzerland, Japan …”). When challenged on this at the 2009 AGM, Kenwright’s incredible response was, “I’m not answering your question. I’m bored with your question”.

Whoever buys the club would need very deep pockets. First, they would have to buy out the directors’ shares (Kenwright 25%, Earl 23%, John Woods 19%), but they would also have to repay the loans, fund a new stadium, pay for new players and inject working capital. Not a very appealing prospect from a financial point of view. Just look at Randy Lerner at Aston Villa: he paid £63m to takeover the club, but has since pumped in another £200m to improve the squad – without spending anything substantial on the stadium.

This is a major issue for Everton, as the other clubs striving to break through the glass ceiling all have rich sponsors (Villa – Lerner, Spurs – Joe Lewis, City – Sheikh Mansour). As Kenwright put it in the annual accounts, “maintaining our progress, continuing to punch above our weight will be very difficult”. He added, “At the end of the day, the club’s finances will be key to everything”. If that is indeed the case, Everton’s fans might have to settle for mid-table mediocrity, unless Moyes can continue to “work miracles”.

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