The reality of the “conditional minded to approve” requirements

Forgive me for yet another article about Everton’s finances and in particular, the attempted takeover by 777 Partners.

Whether you are pro-777, anti-777, or just want what’s best for our club,  objective analysis of Everton’s (and 777’s) position is desperately required. The news on Friday, broken by Bloomberg’s David Hellier (someone I have got to know quite well in recent months) of the Premier League’s “mind to approve” albeit with conditions letter to Farhad Moshiri and Everton was greeted as a major break through after more than six months of impasse. 

The conditions are numerous though.  As reported by Josimar, the headline conditions are as follows: 

(i) Conversion of working capital  loans by 777 totalling just over £150 million into equity, 

(ii) Funds into an escrow account to keep the club going for the rest of the season, 

(iii) Proof of funding to complete the new stadium, and repayment of MSP’s £158 million stadium loan by mid April. 

(iv) Payment to Moshiri : £64 million up front, rising potentially as high as £130 million if a series of milestones are met.

No logical analysis of these conditions could possibly conclude that the Premier League has latterly kicked itself into gear and decided what the approval conditions should be, and set a completion date of a maximum of four weeks – mid April. I say four weeks because I believe the letter was delivered on Monday 18th March. 

Indeed as far back as late September,  2023, a week after the agreement between Moshiri and 777 Partners was announced I posted the following on X:

With the exception of Rights and Media Funding, the conditions remain identical. Which brings us to the key question, if these conditions or similar were known six months ago why less than a month before what appears to be a hard deadline have matters not been concluded?

As I said a couple of days ago, Everton’s position has deteriorated markedly in the last six months and 777 Partner’s position even more so. It makes no sense that if the financial conditions could be met, they wouldn’t have already completed the transaction. It makes no sense to Moshiri, to Everton, the Premier League nor indeed (and particularly) 777 Partners. 

777 Partners have sought external investment for their football business for many months. In the third quarter of 2023 (September to be precise) 777 Partners alongside Tifosy Capital had issued an investment deck to potential professional investors entitled “Project Echo”. Included in that was the very clear reference (and importance) of the inclusion of Everton Football Club. Raising funds appears to be contingent on Everton’s inclusion.

Note that even with the inclusion of Everton, and with significant player trading profits projected across the group, the football operations remain significantly loss making.

From the above it is clear that 777 Partners were minimally testing the market for further capital injections from third parties into their football operations. Tifosy Capital failed to raise any new capital.

In order to satisfy the  reported conditions, 777 Partners are required to provide significant sums of capital. Something which anyone with any knowledge of their finances would find quite a challenge.

As discussed many times on these pages and various podcasts, and as evidenced, circumstantially at least, by the numerous law suits against 777 Partners, the reports of renegotiated tax debts, late payments to employees, the situation at Standard Liege, the tax dispute in Canada and many other examples, 777 Partners and their portfolio companies are not exactly awash with cash or spare capacity to draw down fresh capital. Indeed, the re-insurance connections with A-Cap and 777 Re. point to divestment, which not only cuts off future cash raising facilities but reduces the size of their existing balance sheets which are largely invested in illiquid privately held businesses.

Given the urgency for new capital, as a requirement to fulfil the Premier League’s acquisition conditions and Everton’s own financial position it seems extraordinary that such requirements would be fulfilled at this late stage in the process.

How much capital is required?

Minimally, a reasonable estimate is as follows:

Working capital until season end –£60 million

Repayment of MSP’s stadium loan – £158 million

Remaining funding for stadium- £100 million

Minimum payment to Moshiri  – £64 million

That’s a total of more than £380 million required in cash. In addition there’s the £150 million of working capital loans to be converted into equity. Ordinarily that would not require fresh cash. However, it is understood that the funding of these working capital loans were through borrowings incurred by 777 Partners and associated companies. As a result, these loans incur onerous interest costs. Given the cash constraints of their businesses, the capital injection required (as described) is it sensible to assume 777 Partners can convert loans to equity without repaying the underlying loan, when those loans themselves carry very high interest costs to the 777 Partnership?

A further complication

There’s a further complication. Part of the conditions placed on any would-be purchaser of a Premier League club. That is the conditions surrounding the Acquisition Leverage Compliance Certificate as required by Premier League Rule E.15.

This is the section of rules that looks at the ownership group, how they are financed and specifically how the acquisition of a football club is financed. It has many conditions including:

1.8. Copies of all shareholder agreements and all other agreements regarding the shares of each entity within the Group (including pledges, security interests, options, pre-emption rights, nomineeships, trust agreements, etc.) or any other arrangements conferring rights (including voting rights) on third parties which might impair or influence the exercise by any registered holder or beneficial owner of any right attached to or deriving from the shares;

1.9. Details of share/loan capital allotted, issued, or agreed to be allotted or issued by each entity within the Group since the date of the latest annual accounts of the Club;

……………………….

1.15. A copy of any financial model used in connection with the proposed acquisition, which will include profit and loss, balance sheet and cash flow projections relating to the Group and will contain an acquisition debt cash flow model showing the debt servicing of any Acquisition Debt (for these purposes assuming completion of the acquisition of Control of the Club); 

“Acquisition Debt” means, the aggregate amount of all obligations incurred by the Proposed Acquiror (to the extent they are or will be secured over the assets of the target Club) and incurred by the target Club in connection with or following the acquisition of Control of the target Club for or in respect of Borrowings but, in the case of Finance Leases only their capitalised value;

 A.1.6. “Acquisition Equity” means the aggregate amounts of non-Acquisition Debt funds provided by the Proposed Acquiror in connection with or following the acquisition of Control of the target Club; 

A.1.7. “Acquisition Leverage Compliance Certificate” means Form 6 (Acquisition Leverage Compliance Certificate); A.1.8. “Acquisition Leverage Test” means that as at any Acquisition Test Date the ratio of Acquisition Debt to Acquisition Equity does not exceed 65%;

These are the rules which  stop high leveraged acquisitions – in layman’s terms put a limit on the amount of borrowings a purchaser can apply against the club in order to acquire it – essentially to stop a Glazer type acquisition from occurring again.

On the assumption that 777 Partners would pay off their debt that has funded the working capital loans, 777 Partners total cost of meeting the Premier League conditions is approximately £530 million potentially increasing beyond £600 million if Moshiri was to receive his maximum pay out.

Using the 65% leverage limit – the lower acquisition figure would require a minimum capital injection of £185 million cash and a loan facility of £345 million. This is to meet the minimum requirements of the Premier League’s conditions and regulations.

It does not include working capital to cover losses beyond the end of the season, investment in the playing squad, nor Everton’s outstanding player purchase payments, otherwise known as trade creditors. 

Neither does it take into account Rights  & Media Funding credit facility of up to £225 million, nor the £20 million debt to Metro Bank.

So there are a number of huge obstacles:

• 777 Partners have to find a minimum of £185 million in cash – more if the working capital debt has to be paid off to convert to equity.
• A loan facility of £345 million
• Working capital to meet the business’s (Everton’s) needs beyond the end of this season including funding losses, investing in the squad and meeting net trade creditor repayments.
• Against a balance sheet which has the stadium as an asset, has a playing squad as an asset, but has a large credit facility with Rights and Media Funding, a net trade creditor position and the Metro Bank loan

All of this against a backdrop of possible relegation and the loss of £75-90 million in revenue in year one, much greater beyond that. A situation made more difficult by the second PSR commission and sanctions, which wouldn’t be established before the effective cut off date of mid April.

Additionally, the servicing and maintenance costs of an empty new stadium which won’t be entered into prior to the start of the 2025/26 season.

So, that’s the reality of the situation – can 777 Partners put together such a deal? There’s nothing to suggest that they’re in a position to do so, nor have been at anytime in the last seven months. Why should we expect anything different in the next month?

Moshiri has wasted a huge amount of time, he’s allowed the club’s position to deteriorate significantly in recent months whilst his chosen acquiror’s position has deteriorated even more sharply. It really is the most appalling mess, with no realistic solution in sight – not with the current participants at least.

Far from being a conditional approval, these are terms  that, in my opinion are impossible to meet.

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