Everton?s impending takeover, or not as the case may be, is the hot topic of discussion amongst Evertonians at the moment. According to Chairman Bill, it is potentially the most protracted asset sale of all time, having been trying to shift his (and his fellow shareholders?) shares for what seems like an eternity.
It?s always about the dough
I?ve been involved in the purchase and sale of private companies for a good few years and, believe me; the complexities of these transactions shouldn?t be underestimated. Putting a structure together that works for all parties, making the tax ?work?, trying to get financing (especially when banks aren?t lending) and negotiating with buyers/sellers (and their lawyers, accountants and bankers) and (heaven forbid) the Government can be a logistical minefield.
However, in my experience, any difficulty can be overcome (yes, even the Government) and the most complex transactions can be executed as long as everyone agrees on one thing: Price. And, for me, herein lies the problem.
I think even the most financially illiterate individuals could come to the conclusion that if Everton was put on the market this afternoon for £1, we would have new owners by tea time, such would be the appetite to own one of the oldest, most prestigious and famous football clubs in the world, currently in a secure position in the most lucrative league in the world (for now).
Following that logic must bring you to the natural conclusion that Everton?s ?fair value? lies somewhere between £1 and the current asking price. You see, the above complexities can delay a sale by six months, maybe a year, but assets that have been ?on the market? for ten years and have not been sold are over valued by the vendor. To borrow an Americanism, it?s ?economics 101?.
The devil is in the detail (valuation)
I?m not going to bore everyone with the finer points of valuation because, to be honest, it?s irrelevant and I?ve already bored you enough. You show me a private company valuation (including one of my own) and I?ll show you why it?s inaccurate. The reason for this is that they are all subjective and built on the architect?s assumptions.
However, two areas that always get focussed on in private sales, without fail, are: The level of debt at the point of sale and the historical lack of capital expenditure.
The reasons for this are that they will both be netted from the total value of the business or ?enterprise value? when arriving at the all important number, the amount of cash that will change hands at completion or ?purchase consideration?.
Leverage: Everybody?s friend except the vendor
Debt (and debt-like-items eg, historical transfer fees outstanding) gets knocked-off the enterprise value because it?s how the vendor has chosen to fund the business expansion (stop laughing at the back). He could have used his own cash (equity) after all.
We don?t know what Everton?s debt is today but at 31 May 2011 it was £47.7M. Let?s be kind and assume that the outstanding debt is now £35M due to player sales (which might not have gone to the bank depending on your choice of newspaper) and wage reductions. I?m also ignoring debt-like-items here as they would only be uncovered during due diligence but I?ve seen buyers try to include onerous finance leases in here too!
That?s a £35M reduction in purchase price before we?ve even started.
The Old Lady
The buyer is acquiring the right to the future cash profits of the business (that?s right, I said profit). This number is always estimated using EBITDA (earnings before interest, tax and amortisation) but after taking the required level capital expenditure into account i.e., all businesses need a certain level of capex and this will impact (reduce) the return a buyer can make on his investment.
Here comes the incumbent shareholders? second issue: There has been no investment in capex since the Park End stand was built with the proceeds of Alan Ball?s sale to Arsenal. This means that a buyer is going to need a large out-flow of post-acquisition cash in order to keep the business in its current state, never mind fund expansion. The buyer will add up the historical level of under-spend and knock it off the purchase price.
To be honest, this number is difficult to estimate for obvious reasons, but the Board has suggested in the past that Goodison needs substantial investment to avoid a safety certificate revocation. Again, let?s be kind and assume that £20m of investment is required to keep Goodison and its limited corporate facilities in working order. Remember, this isn?t money for a new stadium (which might also be needed) it?s money that really should have been spent already.
For those of you thinking I?ve overestimated this number, remember that there has also been significant under-spend on the playing side too. We are effectively renting players.
The final reckoning
You don?t need to be Warren Buffet to see that (based on my rudimentary assessment) a buyer could be looking for a £55M (maybe more) reduction in purchase consideration before even discussing enterprise value i.e., even if you conclude that the business is ?valued? at £80M based on its potential future profits, the outgoing shareholders would only get £25M.
In conclusion, it?s my view that the main reason the club hasn?t been sold to date is price. I don?t really see how it can be anything else.
ps ? I don?t think the value of the business is anywhere near £80M given that all you?re effectively buying is a tired, ageing brand and the right to incur future losses, but that?s a story for another day. Remember that, based on the above, the shareholders need a valuation of £55M to sell the club for £1.
, The ShiiT went down in 1999 folks
