Explaining the confusing world of Everton's cash transfer spend

Warning

This is slightly dweeby analysis of Everton's transfer spending that attempts to explain why the figures quoted by EFC Chief Executive Robert Elstone and published in the club accounts do tie in with reality. Hopefully it casts some light on the complex cash flows involved in many transfers, but it may be a bit dull!

Andy

The problem
After Everton announced the purchase of Darron Gibson last week I tweeted:

"Little known fact. Everton have been net spenders on transfers every year since Rooney left (cash figs from accounts)."

Along with this graph:

This was met by some understandable scepticism from Evertonians pointing out that in 2010/11 "we didn't sign anyone". Then by happy coincidence, Everton Chief Executive Robert Elstone published an extraordinary blog on the club's official website entitled "Where The Money Goes", which said exactly the same thing I had said.

The dichotomy between the honest opinion of Everton fans that the club has been more about selling than buying and the numbers in the club's cash flow statements in the accounts showing net spend over each of the last six years needs explaining.

The problem arises with the phasing of payments for players and receipts from their sale and from the fact that the only information we have are headline figures for deals, what you might call "the Sky Sports News number", and two numbers in a club's cash flow statement, one for purchases and one for sales.

The details Elstone gave on transfers

This is what Robert Elstone has to say about Everton's transfer activity since 2006/07 (emphasis as in original):

"[2006/07] We spent £4m net on new players (money we paid out on signing including Kroldrup, Davies, Johnson and Lescott less money banked on the likes of Rooney, Bent, Kilbane and Davies).

[2007/08] A net spend of £15m (further money we paid out for Kroldrup, Johnson and Lescott and new spending on the likes of Howard, Jagielka, Yakubu, Baines and Pienaar, less the money banked for Davies, Kroldrup, Beattie, McFadden and Naysmith).

[2008/09] We spent £6m net on players(payments for Yakubu, Baines, Howard, Kroldrup, Lescott and Fellaini, less monies in for McFadden, Kroldrup, Beattie and Johnson).

[2009/10] We spent £3m net on players (payments out on Yakubu, Fellaini, Bilyaletdinov, Distin and Heitinga, less monies in for Johnson, Rooney and Lescott).

[2010/11] We spent a further £7m net on players (money spent on Fellaini, Heitinga and Gueye, less cash in for Lescott and Pienaar)."

Modelling Everton's cash transfer spend

We can look at Elstone's long list of purchases and sales in more detail in the table below, along with the actual cash flows from the Everton report and accounts.

We can then apply some estimates of transfer prices, I have used figures from transfermarkt.co.uk except for Tim Howard for whom no figure was available on the site and I have estimated £3m, the sale of Simon Davies (est £2m) and for Rooney where the relevant stage payments for 2007 and 2010 are estimated from note 11 of MUFC's 2005 accounts.

Except in the case of the Rooney stage payments and the payments for Lescott, I have assumed that where cash is received or paid over multiple seasons all payments are equal (a modelling simplification I concede), so we can get to an estimated payment/receipt per season:

We can then apply the payment/receipt per annum estimated to the sequence of payments given by Elstone and compare the calculated figures to the actual cash flows in the report and accounts:

As can be seen from the table above, this model matches the actual numbers from the accounts pretty well, with an error of only £1-2m per annum.

Conclusion

I am not claiming the above model is perfect, but hopefully it shows why Everton's published numbers are correct. The issue of phased payments creates significant confusion when people examine football club accounts, something we will no doubt see with Chelsea and Liverpool's next few results in which the £50m paid for Torres will be spread over 5 years....

It's worth noting that for two years in 2003/4 and 2004/5, Manchester United, under pressure from the club's major Irish shareholders Magnier and McManus published detailed player by player analysis of all transfers. The example below from 2004/05 (apologies for the low quality) shows the complexity of the cash flows and conditional payments:

Only £1.4m of the £23m cash United received that year was from player sales in that season and only 58% of cash spent related to deals signed in that year.

I can see no logical reason why UEFA, FIFA or national associations shouldn't insist on this level of disclosure, prices paid are hardly commercially confidential, and then everyone could see how much their club does or does not spend and on whom.

LUHG

Everton 2009/10 results: a very typical PL club under very typical financial pressure

Everton are a well run club. There has been no unsustainable "living the dream" at Goodison. The club typically sells to buy players, has had the same well respected manager for nine years and has an active and successful youth set-up. Despite all this, the club struggles to compete financially with better resourced teams and has seen its debt rising steadily year after year. TV income has been securitised (borrowed against) and the club also has bank debt.

The fact that a well supported, prudently managed club like Everton, one that has seen moderate success in recent years, can still find itself under financial pressure during this era of huge TV deals speaks volumes for financial issues in top level English football.

2009/10 results – rising costs and flat revenues

Like almost all the Premier League clubs that have reported results for last season, Everton's income is not really growing (the exception is City who have an uncanny ability to do commercial deal with companies owned by Abu Dhabi). Turnover was down 0.7%, caused by an 11.6% fall in matchday income. The club played 26 home games in 2009/10 compared to 23 in 2008/09, but the prior season included the club's successful cup run (and thus receipts from the FA Cup Prize Fund and gate receipts from the semi-final and two away ties).

Media income rose 3.2%, with the sale of Europa League rights offsetting a fall in Premier League money after coming eighth vs. fifth the season before. Premier League media income represents 85% of broadcasting revenue.

The new tie-up with Kitbag meant commercial income grew 6.1% despite weak economic conditions.

On the cost side there was a depressing familiarity to the results with wage costs rising 10.7% and other costs (ex-depreciation and amortisation) rising 12.2%. Of the seven PL clubs that have reported figures for 2009/10, only Spurs have managed to grow income faster than wage costs. The chart below shows how much wage growth (in percentage terms) exceeds revenue growth (in percentage terms). It is clear that Everton are seeing some of the greatest cost pressure relative to income growth.

The cost vs. income squeeze at Everton caused EBITDA ("Earnings before interest, tax, depreciation and amortisation") to fall from a reasonable £9.4m to just under £1m. That's an EBITDA margin of only 1.2%. The club made a profit of £19m on the sale of Joleon Lescott to Manchester City and this caused the pre-tax loss to reduce from £6.9m in 2008/09 to £3.1m.

2009/10 results – cash flows weak, debt rising

To understand the problem Everton has, we have to look at the cash flow. As described above, EBITDA (cash profits) were very low as wages and other costs grew rapidly. Operating cash flow was only £1.4m, but the club had to pay a net £4.5m in interest on its securitised debt, bank debt and overdraft. This meant the club was already cash negative before any investment spending. [Please not in an earlier version of this blog the entries for player sales and purchases were incorrectly labeled.]

Net player capital expenditure was only £3.5m, reflecting the "sell to buy" disciplines imposed on Moyes by the board. Other investment was tiny (£0.3m), but there was still a cash outflow before financing of £6.9m. The club is paying down the securitised debt over 25 years at a rate of £2.8m per annum. With the club not generating any cash, the club is effectively having to add to its bank debt to repay its securitised debt. In total, net debt rose £6.9m over the year to £44.9m.

The future – a buyer and a new ground?

There are really only two routes out of Everton's financial cul de sac, a new owner with deeper pockets than Bill Kenwright and the current board and/or a new, larger stadium.

Each home game only brings in revenues of around £750,000, way below the "big" clubs who earn £2-3m per home fixture. The government rejected Everton's plans to relocate to a 50,000 seater stadium in Kirkby in 2009 (a plan opposed by many Evertonians). There have been talks between the club and Liverpool City Council about alternatives sites within the city, and there has been some talk of a potential groundshare with Liverpool as and when a new ground is built in Stanley Park. Not only is Goodison too small, it lacks the corporate hospitality facilities needed to generate significant matchday income. Income per available seat was only £19 per game in 2009/10 vs. £30 for LFC (2008/09).

Kenwright has been looking for a buyer for the club for some time, and commented in these results that he was working:

"Tirelessly to find that rich and generous benefactor."

Until Everton secure a new and bigger ground or that elusive "rich and generous benefactor" it looks likely that they will struggle financially. That such a well established, prudently run club with the eighth highest attendances in the Premier League is struggling like it is, tells us much about the finances of the modern game.

LUHG