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AST Analysis of Financial Position of Arsenal Football Club

Posted Monday 20th February 2012

'Has he or hasn't he?' Is money available to Arsène Wenger to strengthen the squad?

Do Arsenal maximise their financial resources and are they financially constrained?

Later this month Arsenal Holdings PLC will release its financial figures for the six months to November 30, 2011. Here the Arsenal Supporters' Trust (AST) seeks to reconcile what will be another profit-generating period with a far from certain financial future.

To recap: In the 12 months to May 31, 2011 Arsenal's football business made a pre-tax profit of £2m and was basically run at break even off flat revenues of £225m, with £125m spent on wages and £20m on new players and contract renewals.

Player sales during the summer of 2011 (with estimated fees) were: Fabregas (£29m - initial payment), Nasri (£25m), Clichy (£7m), Eboue (£4m) and Traore (£1m). These transactions will generate substantial profits as the book value of these players would have been limited due to their contract status, and therefore the profit on player trading is likely to be over £55m (£66m gross receipts less £10m book value).  Summary figure: transfer profit of c£55m.

Players additions to the squad during the summer (with estimated fees) were: (Arteta (£10m), Gervinho (£11m), Oxlade-Chamberlain (£12m - main payment), Mertesacker (£9m), Santos (£6m), Jenkinson (£1m), Park (£3m), Campbell (£1m) and Miyachi (£1m)) totalled about £54m; this cost will be written down over their contract durations and will possibly add an annualised £6m to the amortisation charges.  We do not know how much will have been paid to agents for new signings and lump sums paid for contract renewals such as Vermaelen. This could amount to up to £10m. Summary figure: additional amortisation cost c£6m/pa.  

Revenues for 2011/12 are sensitive to a Champions League exit at the R16 and now an FA Cup exit. However, we know that ticket prices increased by 4% (net of VAT), adding roughly £4m, and believe the Asia tour was a success (perhaps generating £3m gross). The Champions League qualifier provided an extra game and secondary sponsorship deals signed should add around £5m per annum to commercial revenues. This additional £12m revenue will be reduced by a lower merit payment from the Premier League should Arsenal fail to finish in the top four and less TV exposure (Arsenal had 22 televised matches last season, but this season appear on course for approximately 17), costing perhaps £2-3m. Summary figure: increased revenue £10m.  

Arsenal's football costs of £180m are split between wages (£125m) and "other costs" (£55m) and we expect little change in the "other costs" as the one-off  £3m charged to the club to cover Stan Kroenke's takeover will be replaced by the summer tour costs and the extra game-hosting costs. We know that wages will continue to rise as "step-up" agreements are triggered and new deals are signed with players like Wilshere, Vermaelen and Ramsey. The wages of the departing players will have been more than matched by the new player additions and we forecast on a full-year basis that the estimated £10m of revenue improvements will be spoken for by the extra player wages.  There is still cash to be received as the remaining property deals close (c£35m for Queensland Road and Hornsey Road), but we do not believe this will be received in the current financial year and expect this in late 2012 or early 2013. Summary figure: no net change to costs in this period.   

Arsenal's financials are always weighted to the second half of their financial year as obviously during June, July and half of August there are no competitive matches, meaning that matchday and TV revenues are disproportionately earned in the December-May reporting period (2010/11 split of revenue was £98m first half, £127m second half). However, this year the club had four extra home games before November 30, 2011 (14 v 10) and we expect matchday income will be up £10m on last year's interim figure, with further year on year gains as mentioned above, giving first half football revenues of £113m (+15%). Summary figure: half year football revenue up £15m from same period last year.  

As stated, "other costs" will have increased due to the tour costs and extra home games staged, and we expect a 10% increase on last year's first half wages of £61m (it may be the late signing on 1 September of five players slightly skews this figure). Summary figure: final year end wages and "other costs" up £12m from same period last year.

In summary we are expecting to see last year's first half football loss before player trading of £13m to be reduced to perhaps £10m (extra games), but then taken to an overall profit before tax of £45m generated by player sales.

But what does this profit actually mean? Is it cash to spend on the squad or is it just accounting profit?

Cash reported on the balance sheet on two days of the year (November 30 and May 31) is anything but cash to spend on squad strengthening, due to the timing of receipt of season ticket monies, the way player transfers are accounted for and the historic "upfronting" of sponsorship cash that was needed to build the stadium. Clearly there is much supporter interest in real cash available so below we set out an AST analysis of the cash position.

During 2010/11 cash reserves were boosted by property sales (+£25m) and a tax refund (+£14m) but season ticket money was received later and sponsorship received in advance fell by a combined £25m leaving a year end cash figure of £160m.

Starting with £160m we must:

  • Deduct £32m held in the debt service reserve account (for future stadium repayments)
  • Deduct estimated season ticket advances (£65m) and estimated VAT payable (£13m)
  • Deduct cash "trapped" in the Queensland Road property development (£4m)

This leaves a useable balance of £46m. Adding to this the net proceeds of the summer transfers (£14m) and subtracting agent fees and contract renewal fees, Arsenal have in the region of £50m available "to spend or to save for a rainy day".

The AST is always at pains to point out that a player coming in on a four year deal at £50k per week has a total contract cost of £10m in wages (£2.5m x 4yrs), and these future wages of net squad additions need to come from either savings when other players depart or cash reserves and/or the remaining £35m of expected property realisations. It is for this reason that the "resale value" of a player has often appeared as important to Arsenal as the day one impact the player has on the first team squad.

Arsenal always spends all its football income. With a wage bill (all employees, not just playing and coaching staff) of c£130m (fourth highest in the Premier League) the club is not "cheap" and has paid generously to assemble and remunerate the current squad. Quality and availability is another issue!

With £45m of accounting profits, and cash available of approximately £50m, but qualification for the Champions League looking precarious, the AST sets out below some of the implications for the club in the weeks ahead and the questions it will ask of the owner and Board given the current state of affairs

Arsène Wenger has said that qualification for the 2012/13 CL is "compulsory" (one assumes from a footballing point of view) and failing to do so would be a "disaster". The AST estimates that the cost to the club of failure to qualify for the Champions League is circa £45m in annual revenues. A more detailed assessment of the cost of not being in the Champions League is: 

  • c£27m+ of money paid directly from UEFA as TV and merit payments for participation in the Champions League.
  • An impact on player retention and recruitment (most apparent in the reluctance of Robin Van Persie to commit to a new contract)
  • An impact on premium seat sales (which account for c40% of total matchday income) and general admission season tickets (which include seven pre-paid cup credits that have historically enjoyed four-six home CL games per season) if Arsenal fail to qualify for the top European competition; we expect see both lower prices and attendance for Europa League matches
  • The two major commercial deals for shirt sponsorship and kit manufacture currently yield about £14m pa combined against current fair market value of closer to £40m. These deals are up for renewal in June 2014 and there would be an impact on the value that can be secured given a seven year period of no trophy successes and no CL participation.

To conclude, the AST recognises that that the £50m cash surplus and £35m future property money does provide a safety net for CL non-qualification, but there are UEFA Financial Fair Play (FFP) and club strategy issues that concern our members. The AST still seeks a fuller explanation from the new owner as to his vision for the club. Greater engagement by Stan Kroenke (as he committed to in the Takeover prospectus) would help to address this.

The key questions that arise from this financial analysis, that the AST plans to put to the club are:

  1. There is a perception and concern amongst many fans that the Board has withheld funds from the manager. Did the manager have the option to use all or some of these cash reserves in summer 2011 and January 2012, or are resources being held back as a contingency for failure to qualify for the Champions League?
  2. Is it acknowledged that the wage spend needs to become more efficient? The current wage bill of c£130m is sizeable and in the view of the AST there is clear inefficiency in wage spend evidenced by poor performances on the pitch and the number of players the club have either on loan (ie can't be sold) or deemed not good enough to play in the first team. Our wage spend is 40% higher than the payroll at another club in North London and Arsenal are in danger of being overtaken more than temporarily by those who spend their wages more efficiently. Is addressing this a priority and are contractual renewals overseen and signed off by the Board?
  3. If reduced revenues push the club into a loss making position, are there FFP issues for Arsenal's playing cost base in 2013 and 2014?  It was only during the summer of 2009 that a rights issue proposal to give the manager additional firepower in the face of increased competition was rejected by the Board as "not necessary" citing specific advice from Arsène Wenger. Would the same decision be made again and will the Board engage with the AST and other shareholders to look at other sustainable financing options, compliant with FFP, which could help Arsenal to once again compete effectively at a higher level?