A version of this article was first published on May 9. We are republishing it today with the news that Everton have confirmed 777 Partners’ proposed takeover has fallen through following the expiry of the purchase agreement.
Nobody really knows the origins of the phrase “the penny dropped” — it is something to do with old slot machines or public toilets, apparently — but everybody can spot it when it happens.
The civil suit filed by London-based investment firm Leadenhall at the start of May against, among others, 777 Partners, the Miami-based investment firm with whom Everton owner Farhad Moshiri has been negotiating for over a year.
In the suit, 777 was described as a “house of cards”, with Everton “the latest shiny object” of 777 boss Josh Wander’s “fraudulent scheme, solvency aside”.
777 declined to comment but, for everyone else, the implications feel clear. Perhaps Moshiri, too, is finally getting his head around the idea that these 777 chaps might not be able to close the deal he agreed with them in September. And if he needed a further nudge, this week it has emerged 777 has called in restructuring experts.
In a memo which The Athletic has seen, staff were told that “a team of professionals from B Riley Advisory Services” had been retained to help 777 get through “various operational challenges”. B Riley Advisory Services is a division of B Riley Financial, a Los Angeles-based financial services known for its expertise in turning around or liquidating failing companies. 777 declined to comment.
On June 1, Everton confirmed in a statement that: “The agreement between 777 Partners and Blue Heaven Holdings Limited for the sale and purchase of the majority shareholding in the club expired today. The club’s board of directors recognises the considerable level of financial support 777 Partners has provided the club over recent months and would like to take this opportunity to thank them for this.”
So this penny has taken a while to drop, but now that we are all on the same page, let us consider what is likely to happen next.
The following are the four most plausible scenarios that Everton face in the coming months, in ascending order of likelihood. A warning (and potential spoiler): if you only want good news, skip to the last one…
777 finds the money
Despite everything, there is still a greater than zero chance that 777 boss Josh Wander persuades someone to lend him the money he needs to satisfy the conditions the Premier League placed on its approval of this deal. The period of exclusivity has expired meaning Everton can discuss a deal with other potential buyers but 777 have put a significant amount of money into the club and retain a relationship.
But 0.1 per cent, a one-in-a-thousand chance, is greater than zero and those are the odds you should be seeking.
777 has been looking for other people’s money to close this deal for over a year and tried all the usual suspects. Most of them did not even want to talk about it. The one firm that agreed to try to raise some money for them, Tifosy, could not.
That has left Wander with one source of funding, the New York-based insurance and investment group A-Cap, which has been funnelling its customers’ insurance premiums into 777-related businesses for several years.
A-Cap coughed up the £15million ($18.8m at current rates) Everton received via 777 last month, taking the club’s total IOU to 777/A-Cap to roughly £200million. Those loans have kept the construction of Everton’s new stadium on track and the lights on this season.
But for reasons we have already reported — the problems popping up almost weekly in 777’s portfolio and A-Cap’s rating and regulatory woes — even that source of cash is drying up. It has already evaporated for 777’s aviation investments, with Australian budget airline Bonza crashing into administration last month, leaving hundreds of employees and customers in the lurch.
Josh Wander shakes hands with Farhad Moshiri in November (Peter Byrne/PA Images via Getty Images)
The overwhelming impression that Everton have already got the last drops from the A-Cap tap is supported by news from elsewhere on Planet 777, with late payments (again) at two of its other football clubs — Red Star in Paris and Standard Liege in Belgium — dramatic cost-cutting at basketball’s London Lions, and the forced sale of its stake in Canadian airline Flair.
That is before we even consider the allegations in the 17th recent lawsuit filed against 777 for unpaid debts. Moshiri presumably missed the previous 16 complaints but Leadenhall’s, filed in New York last Friday, was simply too frightening to ignore.
The London-based investment firm has accused 777 and A-Cap of running “a giant shell game, at best, and an outright Ponzi scheme, at worst”.
It is a civil claim at this point, and has not been challenged in court, but Leadenhall says it is owed more than $600million by 777 and Wander has borrowed that money using collateral he either did not own, had invented or had already pledged to someone else, namely A-Cap.
This is pretty basic white-collar crime and it is usually pretty easy to prove. The 82-page court filing says Wander has already confessed to it, initially saying it was an IT glitch and then an “embarrassing” mistake he would fix. 777 has declined to comment about the lawsuit.
A-Cap, on the other hand, has issued a statement to say it has not defrauded Leadenhall and is not in league with 777 — but it has admitted it has first dibs on all of 777’s assets, which is understandable when you consider that it has lent Wander’s firm about $2billion.
That admission, however, would appear to prove the central claim that 777 has “double-pledged” assets it told Leadenhall were “free and clear” collateral for its loans.
Enough, already. Even Moshiri has got it by now. Nobody is lending 777 any more money. Maybe you should look for odds of more like one in 10,000.
The men who want to buy football clubs
A new party emerges to buy Everton
We could also call this the “waiting in the wings” scenario: who would buy Everton if 777 got out of the way?
The rationale for this theory is that nobody is making clubs like Everton any more, with their proud history, large fanbase, Premier League status and almost finished new home, which does look amazing. As some have put it: “What’s not to like?”
There are a few problems with this pitch, though.
For starters, construction at Bramley-Moore Dock is ongoing, so perhaps £100million is needed to finish the stadium and then fund the period between Everton moving out of one home and into the other.
Work continues on Everton’s new stadium (Tony McArdle/Everton FC via Getty Images)
Then there are annual losses to cover. Under Moshiri, the club has lost more than half a billion pounds in seven years. OK, there was a pandemic in the middle of that but Everton lost almost £130million in the two seasons after fans were allowed back in grounds.
This partly explains why Everton have debts of more than £1billion, which — even if you forget the £450million of unsecured loans Moshiri has pumped in since 2016 — still leaves just under £400million in secured, third-party debt. Then there are 777’s IOUs, which have a smidgen more security than Moshiri’s but nowhere near the protection the club’s other big creditors have.
And then you have the team, which has pulled away from the jaws of the Championship for the third straight season but has eight players out of contract this summer, owes £70million in transfer instalments and will almost certainly have to sell its two most marketable assets next month to avoid a third breach of the league’s financial rules. Oh, and the three teams Everton have to beat to stay up next season are surely going to be better than this season’s trio.
So, we have a heavily indebted, loss-making company that faces another battle to avoid a calamitous change in circumstances. The new stadium will be lovely but it only makes business if Everton can fill it at least 20 times a season.
When you look at it this way, there is plenty not to like.
Don’t believe me? OK, why did nobody step up and buy Everton before 777 added £200million of debt to the balance sheet? Why did nobody step forward when 777’s 12-week approval process entered its 30th week?
There are simple answers to these questions. Everton are a great club but they are not worth the circa £750million required to settle the debts that matter, finish Bramley-Moore Dock, get the club back on a competitive footing and, presumably, bung in a few million for Moshiri’s shares.
While these things are usually equal parts educated guesswork and wishful thinking, it is telling that when American sports business outlet Sportico came up with a list of the top 50 most valuable football clubs in the world this week, Everton did not make the cut. Its 50th-most valuable club, Major League Soccer outfit Houston Dynamo, are apparently worth $550million (£440million).
Forbes, another American business title, does a similar list but it likes Everton more than Sportico, giving the club a valuation of $744million (£595million).
Just to avoid any confusion, both numbers are enterprise values, which means the cost of the equity (what Moshiri might want) and the debts you acquire (what Moshiri wants to leave behind).
So how do we get closer to a number that would tempt these North American/Gulf bidders to exit the shadows?
Everton are placed in administration
Similar to Chapter 11 of the U.S. Bankruptcy Code, administration is a legal process in the UK that gives troubled companies some breathing space to restructure debts and hopefully continue as a going concern.
A company can be placed in administration by its directors, a creditor or a court, with responsibility for running the business given to an administrator or co-administrators who are licensed insolvency practitioners.
Their job is to try to save the company, usually by selling it to a new owner, minus some of its original debt. If that is not possible, the administrators must still try to achieve a better return for creditors than they would get if the company was wound up — the idea being that the companies will get better offers for their assets while trading than if they hold a closing-down sale.
Sometimes, companies with cash-flow problems arrange the sale of the bits of the business they believe are salvageable and then bring in an administrator to flog off or shut down the bits that are not. This is called a ‘pre-pack administration’, done in the hope of getting the company back on its feet quickly.
(Tony McArdle/Everton FC via Getty Images)
There is another type of insolvency process, which is legally distinct from administration but involves a lot of the same people doing similar things, called a ‘company voluntary arrangement’ (CVA). The clue is in the name, as this is an agreement between the creditors to accept less than they are owed. Whether to accept the deal or not is decided by a vote in which your voting power is based on how much you are owed, with secured creditors having a bigger say than unsecured ones.
CVAs are football’s preferred route out of insolvency but, whichever way you take, you are still going to be docked 12 points if you are in the English Football League (EFL) and nine in the Premier League. The EFL has done this many times over the years but Portsmouth, in 2010, are still the only Premier League club to go into administration.
So why might Everton’s board of directors, or one or more of the club’s creditors, opt for a CVA?
It would shed a lot of debt, particularly the junior and unsecured variety held by 777 and Moshiri, bringing Everton’s enterprise value down to a level that would attract interest from far more credible custodians.
There may even be a competitive auction for the restructured business, which would help creditors get back more pennies in the pound. And the moratorium — a delay — on new payment demands would give the administrators the time to really tidy the business up.
Like Bolton Wanderers, Derby County, Plymouth Argyle and many others before them, there is every chance that a leaner, stronger Everton could emerge, under new owners, ready to compete in their new home.
And, according to Premier League rules, if Everton go into administration before the final game of the season, the nine-point deduction would apply this season, not next. They are 11 points clear of 18th-placed Luton Town, with two games to play.
But an outcome that rosy does not come without thorns.
Insolvency processes are horrible. Companies in administration must break even, so administrators nearly always have to make people redundant, cancel work and turn things off.
Under football’s rules, all debts to players, other clubs and leagues must be paid in full. That is non-negotiable. Fail to do so and you lose your right to play in a league. This means that, however much money an administrator can bring in from a new buyer, a big chunk of it is ringfenced for football creditors before you even get to the creditors who secured their loans on the club’s property and possessions. They usually get most of what they are owed, too.
This means there is very little for everyone else, which will include all of the local businesses who supply Everton with goods and services. They will do well to see a quarter of what they are owed, putting many of them in danger, too. This means suppliers will be far less likely to trust Everton in future.
Then there is the very counterproductive impact of administration on a football club’s most valuable assets, the players. They can effectively rip up their contracts and look for employment elsewhere as free agents. Even if they choose not to, their value plummets, as every bidder will know the administrators need cash to pay bills and wages, including their own, and they are almost as expensive as Premier League footballers.
(Michael Regan/Getty Images)
And finally, there is a very specific problem for Everton. Laing O’Rourke, the contractor building the new stadium, will almost certainly have a clause in its deal with the club that will enable it to renegotiate a new price for their work. This is relevant, as a large part of the 2021 contract was fixed at an Everton-friendly price. Since then, building and material costs have risen, squeezing the contractor’s margin. It would love to reopen negotiations.
So, in total, there are hundreds of millions of reasons that administration is not the preferred way out of this mess.
Everton’s main creditors take control
Perhaps the best way to explain this scenario is that it would be like a CVA but without as many redundancies, losing nine points or paying insolvency practitioners for thousands of hours of work.
And the good news does not stop there, as this could happen in a matter of days.
First, MSP Sports Capital, the New York-based investment firm that pulled out of an earlier deal to make a gradual takeover at Everton last year, exercises its right to seize 50 per cent plus one of Everton’s shares from Moshiri for 777’s failure to repay the £158million loan they gave to Everton last summer.
Strictly speaking, it was Moshiri’s failure to repay the loan but his circumstances changed when Russia launched a full-scale invasion of Ukraine. So Moshiri wanted 777 to pick up this bill, which is why the Premier League made it part of its test of 777’s ability to fund the club. But the April 15 deadline for repayment came and went, with MSP agreeing to give Moshiri/777 until the end of the season to find the money. That deadline has now passed too.
MSP, it should be added, also secured its loan on 100 per cent of the Everton Stadium Development Company, the club subsidiary that owns the new ground. This means it could have taken control of the club and the building site four weeks ago. The fact it did not is… interesting.
It is not, however, the only lender with a fighting chance of seeing a good chunk of its money again, as Everton also have a credit facility — a credit card for companies — with Rights and Media Funding (RMF).
The Cheshire-based firm, which has no full-time employees or website, has loaned Everton about £225million secured against Goodison Park, the training ground, the club’s bank account, transfer receivables, media rights income, the contents of the club shop, whatever is in the groundkeeper’s shed and anything else.
Added together, this probably puts RMF in a stronger position than MSP in terms of security but it does not have MSP’s power to impact change, which is why they need each other. This represents a significant change in the dynamic to last year, when it was RMF’s opposition to the deal Moshiri had offered MSP that scuppered that plan.
(Tony McArdle/Everton FC via Getty Images)
Now, however, they are completely aligned on the realisation that all of Everton’s creditors need to take what is known in financial circles as “a haircut”, but they are having a little bit off the fringe and tidying up the back and sides, while 777 and Moshiri are getting buzz cuts.
The latter duo could, of course, say “no thanks”. But MSP and RMF could remind them that administrators’ clippers can go even shorter.
An MSP/RMF-run Everton would still need to sell Jarrad Branthwaite and Amadou Onana this summer to avoid any further Premier League charges, but the plan would be to agree debt write-offs and/or very long-term repayment schemes that would bring the amount a new owner would need to find to more like £500million.
And, just to be clear, MSP/RMF would not want to be in charge for long. This intervention would be about preparing the club for sale in a far better fashion than Moshiri managed.
Can it happen? Sure, it just needs everyone to be rational. Nothing to worry about, then. Right?
(Top image: Everton co-owner, Farhad Moshiri: Photo by Ian MacNicol/Getty Images)
