Everton takeover: Why the Friedkin Group deal is off and what happens now? — The Athletic 19/7/24
The club statement about the latest collapse of takeover
talks tried to put a positive spin on things by referring to exploratory
discussions concluding, “good faith” and “alternative options”, but it is very
hard to glaze a sandwich this unappetising.
To mix sporting metaphors, this spin ended up being a juicy
full toss that Manchester United fans have mercilessly dispatched into the
upper deck of the Jarrad Branthwaite Stand.
The fact that 99 per cent of the replies to the tweets we
posted about the demise of the Friedkin Group’s (TFG) takeover related to
United’s pursuit of Everton’s talented centre-back is almost as depressing as
the state the 146-year-old club find themselves in today.
Almost but not quite because Everton — nine times champions
of England, founding members of the English Football League and co-creators of
the Premier League, Liverpool’s senior club — are in a deep hole and that is
far more serious than transfer banter.
So, having set the scene, let us dive into the details.
What has happened to the Friedkin takeover?
In short, it is off.
The Texas-based firm, which is run by American billionaire
Dan Friedkin, emerged as Everton’s potential saviour last month.
As first reported by The Athletic, TFG had been looking to
add a Premier League club to its existing multi-club stable of Roma in Italy
and Cannes in France for some time. The implosion of Everton’s last would-be
hero, 777 Partners, appeared to present an opportunity to swoop in, tidy up the
debts and pick up a top-flight club, with a large fanbase and storied past,
that is about to move into a wonderful new stadium.
And that remains an attractive headline offer to anyone
looking for an English club. Unfortunately, the rest of the story is less
attractive, and that is what TFG discovered over the last four weeks of due
diligence.
Rumours about the deal unravelling started to circulate this
week, but TFG and Everton’s owner Farhad Moshiri initially denied the takeover
was in difficulty.
That changed late on Thursday, though, when TFG informed
Moshiri, who purchased his initial 49.9 per cent stake in Everton in 2016, that
it was out.
It was agreed by both parties to formally announce the news
at 11am, UK time, on Friday. “Blue Heaven Holdings (Moshiri’s ownership
vehicle) and the Friedkin Group entered discussions in good faith to explore
whether a sale could be agreed,” the official statement said.
“Those discussions have concluded. The parties agree it is
in both their interests for Everton to explore alternative options.”
OK, so what really happened?
This was always going to be a complicated deal.
Everton lost almost £400million ($517m) between 2019 and
2023 and, while the club have desperately tried to rein in their spending, the
annual loss actually doubled last year to £89m from 2022’s deficit of £45m.
These losses, and the construction of the new stadium at
Bramley-Moore Dock, have been funded by debt. The biggest amount is owed to
Moshiri in the form of £450m worth of unsecured shareholder loans — money he
will never see again. The rest has come from three external lenders: Rights and
Media Funding (RMF), 777 Partners and MSP Sports Capital. The combined total of
those loans was almost £60om.
We say “was” because one thing has changed in the last
month. TFG has paid off MSP’s loan of £158m and taken the New York-based
investment firm’s mortgage over Everton Stadium Development Limited, the club
subsidiary that owns the new ground.
However, TFG has actually lent Moshiri £200m, as he also
needed to pay the next bill from Laing O’Rourke, the construction firm building
the stadium, and the price of that extra money was a charge over Blue Heaven
Holdings, too, which means TFG could, if Moshiri is unable to pay it back, end
up with the stadium and 94 per cent of the club.
That sounds a lot better for TFG than it is, though. MSP had
the right to claim 51 per cent of the shares in April but did not because it
knew the shares were basically worthless. What anyone who buys Everton is
really acquiring is the debt and the responsibility to fund the team and finish
the stadium.
That sum is a matter of debate that we will return to, but
it is not the reason TFG has walked away.
The obstacle that it has decided it cannot clear is the debt
to 777 and it is not just because £200m is a large number. The real issue is
who that debt belongs to. That is why TFG’s decision is more concerning than
just one interested party changing its mind after a period of reflection.
Go on…
The debt to 777 was accrued in chunks of £20m-£25m between
September 2023 and May of this year, a nine-month fever dream during which
Moshiri tried to convince himself and the Premier League that the Miami-based
investment firm could afford an asset this precious (narrator: it could not and
is now in the hands of insolvency experts, sparking crises at the various
airlines, insurance companies and sports teams it owned).
But most of that money, like most of the money 777 invested
in all of its other ventures, was somebody else’s money… and that somebody is
A-Cap, an insurance group based in New York.
With its future in some doubt, largely thanks to its
exposure to 777, A-Cap has taken control of 777’s assets and is trying to
recoup as much money as it can. Those loans to Everton are assets and they are
currently doing sterling work on A-Cap’s balance sheet at full value.
Nobody buying Everton, however, would want to pay that
amount back — not least because 777’s security was junior to MSP’s and is still
junior to RMF’s.
But who would a buyer do a deal with? A-Cap, right? If only
it was that simple.
To cut a long story short, 777 left quite a trail of
disgruntled customers and investment partners. The most disgruntled and
frightening of those is Leadenhall Capital Partners, a London-based investment
firm that specialises in the insurance industry.
In a blistering lawsuit filed in New York in May, Leadenhall
accused 777 and A-Cap of fraud. The central claim is that 777 borrowed hundreds
of millions of dollars from Leadenhall secured on assets it had already used as
security on other loans, most notably from A-Cap. Known as “double-pledging”,
it is like you or I mortgaging our house with multiple banks. And, if that is
not serious enough, Leadenhall says 777 also used collateral it did not even
own to secure loans.
777 and A-Cap have denied these claims, but the matter is
being argued in a district court in New York. A settlement conference — a last
chance for the parties to come to a deal — was scheduled for last week. I think
we can assume no deal was reached.
So does TFG, or anyone in TFG’s shoes, do a deal with 777,
A-Cap, Leadenhall or the court? Whose £200m is it really?
The uncertainty does not stop there, though, as there is a
very real possibility that once Leadenhall’s civil case is resolved, the U.S.
Department of Justice will file criminal charges.
Again, 777, A-Cap and their principals deny any wrongdoing,
but serious allegations have been made by Leadenhall — and others in separate
cases. Any self-respecting corporate lawyer would have to warn a client looking
at Everton that there may be a potential Proceeds of Crime Act (POCA) issue
down the line.
TFG was certainly concerned about this and talked to
Moshiri’s lawyers about indemnity insurance — but it is very difficult to
indemnify anyone against something as open-ended as a POCA liability, even if
Moshiri was minded to do it. And he was not.
Gulp… so what happens next, then?
Let us start with some good news. Everton/Moshiri do not
have to repay TFG for a year and the interest on the loan is the same rate they
are paying RMF — five per cent over base rate — which means those two loans are
currently costing the club about £40m per year.
Another bite has been taken out of the £800m bill to build
the stadium, too. There is somewhere between £50m-£70m left to pay for “fitting
out” the ground’s interiors and the project remains on target for Everton’s
moving date next summer.
We are afraid that is where the good news ends.
The 777/A-Cap loans are more expensive. The rate has never
been revealed, but we know that A-Cap has been borrowing money itself at 18 per
cent — global investment bank JP Morgan has just bought a corporate bond from
A-Cap at that rate. Nobody, not even that lot, is daft enough to borrow at 18
per cent and lend at 10 per cent.
A conservative estimate would be that Everton are paying £1m
per week in interest payments. It is probably a little bit more than that.
So, the club’s underlying financial position is not
improving and Everton have still not fully replaced the generous sponsorship
income they were receiving from companies linked to Moshiri’s business partner,
Alisher Usmanov. The latter’s placing on the UK’s list of sanctioned
individuals, following Russia’s invasion of Ukraine in 2022, was one of the key
moments in Everton’s recent history.
Everton does, however, hope to bank a decent-sized cheque
through Amadou Onana’s sale to Aston Villa in the coming days, which will help.
As did the two sales they made in June: Lewis Dobbin to Villa and Ben Godfrey
to Atalanta.
But, in reality, these transfers only help Everton avoid any
further problems with the Premier League’s profitability and sustainability
rules (PSR) and perhaps provide some spending money for manager Sean Dyche to
perform another minor miracle by keeping Everton up. The sums earned from
Dobbin, Godfrey and Onana do not really move the needle in the bigger picture.
Selling Branthwaite might, but Everton have refused to budge
from their £70m-plus valuation of the 22-year-old.
Manchester United appear to be the only dance partners at
the moment but before Friday’s takeover news, Everton had felt pretty relaxed
about being able to ignore an initial offer of £35m, plus add-ons, and a
slightly less cheeky follow-up of £45m, plus add-ons.
Suitably rebuffed, United have just spent more than £50m on
18-year-old defender Leny Yoro, a move that appeared to vindicate Everton’s
valuation of the Premier League-proven Branthwaite. But a day is a long time in
football and valuations of players can change even quicker than valuations of
clubs.
Where one player ends up, though, is small beer compared to
what happens to Everton, a club that employs hundreds and is loved by hundreds
of thousands.
The search for a new owner has already restarted — The
Athletic was told the club is back on the market on Wednesday — and the obvious
starting point will be all those who were kicking the tyres when TFG arrived on
the forecourt.
Of those, perhaps the most likely is the group fronted by
London-based entrepreneur Vatche Manoukian, as it did actually make an offer of
£400m, which is significantly less than the sum of the debts but we are looking
for straws here.
Crystal Palace co-owner John Textor also put his head above
the parapet, but it is hard to see how he could get past the A-Cap/777 obstacle
that frightened TFG as he has U.S.-based investors, too, and is looking to
float his Eagle Football Group on the New York Stock Exchange. He would also
need to sell his 45 per cent stake in Palace.
Are there other saviours out there? Sure, there will be
people who see the same upside the Friedkins did and perhaps be as rich as
them, too. But they will have lawyers who make the same observations as TFG’s
lawyers.
And there is also the very stark question of how much
Everton are really worth. There are no hard and fast rules for valuing football
clubs — a multiple of annual revenue gives you an idea, but how much you
multiply by is more art than science — but most experts have Everton in the
middle bracket of Premier League clubs at around £600m, give or take £100m
depending on your buyer’s feelings about history versus geography, or the
number of fans compared to the number of academy prospects.
For some buyers, Everton will tick the right boxes and maybe
they will go to the upper end of the range. For others, they will look like a
reclamation project a long way from London.
The timing is not helpful, either, as there are at least
half a dozen Premier League clubs for sale, all of whom have less debt and
legal uncertainty than Everton.
This is probably enough doom and gloom for any Evertonian to
handle in one go. As if the above is not bad enough, Everton are still meant to
play Roma in a pre-season friendly at Goodison Park next month. I suspect the
Friedkins will not be attending.
For the record, as a supporter of Southend United, a club
that has been drinking in the same last-chance saloon, I am horrified by what
has happened to your club and hope that you find, as we just have, better
owners so you can go back to worrying about misfiring centre-forwards,
full-backs who cannot cross the ball, the design of the away shirt and the
price of a pint. As opposed to wondering if you even have a club anymore.