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September 4, 2013

The Curious Cost of the Everton Loans

By Ted Knutson

What is the first thing you do when you start a new game of Football Manager?

If you’re at all like me, you look for players to sell so you can raise money, especially ones with big contracts. The second thing you do is go shopping for all the young talent (wonderkids) you can possibly find in your price range.

(Note: This assumes that you are the type of person who likes a challenge, and takes charge of a League One/Championship side at most. If you just want to control Manchester City or Chelsea, may god have mercy on your soul.)

In business terms, you are looking to sell overvalued assets to some unsuspecting sucker and turn the cash from those into undervalued assets that have a strong likelihood to appreciate. By doing so, you create a “wonderkid revenue stream,” which is really useful in both acquiring better players, and later selling those players at large profits. Lather, rinse, repeat.

1)      Sell old dudes. Sell expensive dudes.

2)      Buy young dudes.

3)      Train young dudes well and wait for them to become older.

4)      Profit!!!

It sounds kind of silly, but that’s one of the fastest roads to prosperity in the world’s most addictive game/spreadsheet.

One of the things you almost never do at that level is take large salaries on loan. The reason for this is simple – unless you think the loan player will get you promoted, you are completely destroying any asset value that money would have. It flies right out the window as a cost and never comes back. Spending that money on one year of player performance is almost always inferior to buying a good player that you can later sell down the road.

(There is a middle ground of taking great young players from bigger clubs on loan (their wages are usually reasonable or subsidized by the big club), but that’s not the point I’m after right now.)

Why are we talking about Football Manager?

Because I suspect most of our audience have played it, and it’s a reasonable analog for running a football club. You have a fixed budget. You have to balance spending on transfer fees and wages. And the point is most certainly to try and win games, but also to increase the value of your club overall.

The Curious Case of the Everton Loans
Andy Hunter had a piece in The Guardian on Tuesday detailing Everton’s deadline day transfers. The article leads off with this:

The Everton chairman, Bill Kenwright, showed an astute business head as three signings were completed late in the day and the Marouane Fellaini deal delivered more than expected.

Impressive, right? Then it ends with this information:

Everton intend to offer Baines a new contract now the window has closed and, despite making a profit this summer, £2m of the Fellaini fee is owed to his former club Standard Liège while the loan deals for Lukaku and Barry will cost close to £10m. Kenwright, meanwhile, finds himself in the rare position of receiving credit where credit is due.

Oh cool, that’s great business then. You sold Fellaini for £27.5M, and grabbed two strong players for your starting eleven for the next year.

They only cost… TEN MILLION?!?

GarryBarryNow the fact of the matter is that these are the reported fee and salaries. The actual amounts could be less than these, and I would hope they are. There are also deals like the David Villa one that looks crazy on the surface – Atletico bought him for about 5 million euros – but in reality contain things like first option on Oliver Torres that make them much more valuable. Torres is already incredibly talented at age 18, and virtually guaranteed to be a starting midfielder in Spain’s national team in the future.

However, even if the fees/salaries were 75% of the reported amount, the size of them turns a transfer window that was championed as great completely on its head. A club with a revenue stream the size of Everton’s (£80M in turnover) simply cannot pay these types of expenses for a one-year rental. Everton management is delusional if they think the addition of these two players will get them into the Champions’ League. And if that isn’t the result, then what’s the point?

And Now For Something Completely Different…
LambertMagicTo illustrate a different way of spending that money, look at the last two transfer windows for Aston Villa. Villa are a club of similar size and stature to Everton, but one that has been through a rough patch recently, caused by years of ridiculous transfer and wage spending crossed with bad managerial choices.

Under Paul Lambert, all of that has changed. Instead of buying Premier League players for large fees, Villa focus their efforts on overseas and lower league youngsters. I have no knowledge as to their scouting network or how they use analytics, but I can say that last year’s purchases were excellent, and this year’s crop seem good as well.

Player Age Position Fee(£M)
Okore

20

CB

4.1

Tonev

23

LW

2.8

Luna

22

LB

1.8

Helenius

22

CF

1.3

Bacuna

21

CM

0.88

Total

10.88

For £1M more than what Everton are spending on Lukaku and Barry this season, Villa added five potential stars to their lineup. This isn’t to say that they will all be good – on average about half of all transfers are a probable bust – but they aren’t risking much in the gamble. Their biggest risk came on deadline day, where they grabbed 24-year-old Libor Kozak from Lazio for a rumoured £7M. My guess on this one is that they either decided Helenius wasn’t a good enough backup, or they found a good deal on a player they liked, and get to let him bed in for a year before selling Benteke next summer.

One of the massive benefits of buying younger players is that basic physiology tells us they are likely to get better. Their muscles and body of males continue to develop until about 25 years old, and age curves for the different positions suggest there will be peaks at 25 for forwards, 27 for midfielders, 29 for defenders, and 31 for goalkeepers. Buying young players who already perform well lets teams naturally benefit from the age curve.

Also, because the players are young and the transfer fees are low, they are likely on comparatively low wages. This means that they don’t cost much if you aren’t playing them, and you can resell them fairly easily to other teams/countries if things don’t work out. Compare this to Arsenal’s disastrous last four years of loaning out underperformers again and again because they are overpaid and no one wants to buy them, and you will see what I mean. Overpaid bad players are football’s herpes, destined to come back again and again, right when you don’t want them.

Villa are already in a position where they can flip multiple players they bought during Lambert’s first season in charge. For a fee of just under £8M, Christian Benteke made an immediate impact in the Premier League, helping Villa avoid relegation, making Darren Bent and his giant wages expendable, and parlaying one year of performance into a hefty new contract. Given the goalscorer inflation from this summer, I wouldn’t be surprised to see Benteke sell for £35-40M a year from now.

Matthew Lowton and Ashley Westwood, both purchased from League One, are other players whose value appreciated dramatically after one year of Premier League action.

Villa were never really skint, but their savvy in the transfer market paid almost immediate dividends, both in terms of performance on the field, and performance as a business.  A guaranteed £25M profit from Benteke can then be sunk back into the product on the field while continuing to develop players for the future.

It’s a simple philosophy, but one that is correct and hugely rewarding when employed correctly.

Back to Merseyside
koneNow compare this to what happened up at Everton this summer.  Selling Fellaini for £27.5M was good business (though not incredible, since Fell is alleged to have cost £17+M initially), as was the sale of Anichebe to West Brom for a rumoured £5-6M. However, Everton’s incoming players leave a lot to be desired. I liked the loan for Delofeu, who was excellent in Segunda last season and should develop into a fine player. The fee and wages are likely nominal, so this move just makes sense. I also like the purchase of James McCarthy for a rumoured £12.5M. He’s only 22 and is already maturing into a valuable player at the Premier League level. After that though, things go bad quickly.

First you have £5M spunked on a 29-year-old forward in Arouna Kone, a player who will have zero transfer value in a year or two. Wigan buying him for 3M when they were desperate for a scorer was a good gamble and he produced. Everton allegedly paying twice that price a year later is not.  The verdict is out on Robles, but the fee is low enough and he’s young enough that it’s hard to quibble there.

Then you have the reported £10M spent on loans for Barry and Lukaku. £10M to rent two players for a season, when there is no way this team is making the Champions’ League – what’s the point? None of these help the team get younger or add to the asset list of the club. Did Martinez sell Kenwright a bill of goods in getting his hopes up for Champions’ League football? Is Kenwright willing to offset these fairly crazy expenditures with cash injections, something that hasn’t happened before?

Compare this to what Villa are doing and it all looks foolish and misguided. In fact, it’s a lot like what happened to Liverpool during the Hicks, Gillett, and then Comolli eras. Money is going out the door on things that cost too much, don’t add enough to the product on the field, and provide no long-term value for the club.

Mistakes like this when you have Liverpool’s revenue stream costs you hundreds of millions of pounds and years of lost Champions’ League participation.

Mistakes like this at Everton’s level are likely to yield a plunge in performance that takes years to dig out of, especially since the clubs around them (Liverpool, Swansea, Aston Villa, Southampton) suddenly seem really smart.

 

Article by Ted Knutson