Sunday, September 21, 2014

Arsenal - Money Changes Everything

Many Arsenal fans have been unhappy for the past few years about the lack of trophies, exacerbated by the club’s seeming inability to spend its growing cash balance. Therefore, they should have been pleased by the results both on and off the pitch last season, as Arsenal won the FA Cup (for the 11th time) after defeating Hull City 3-2 in a thrilling final, qualified for the Champions league for an extraordinary 17th successive season and also obliterated their transfer record when buying the German star Mesut Özil from Real Madrid.

As Chief Executive Ivan Gazidis said when announcing the financial results for the 2013/14 season, “Our improved financial position has allowed us to supplement the squad with important new signings.” Indeed, Arsenal continued to spend big this summer, bringing three World Cup stars to the Emirates in the shape of Alexis Sanchez from Chile, Mathieu Debuchy from France and David Ospina from Colombia. In addition, the club’s English core was again strengthened by acquiring Danny Welbeck from Manchester United and the highly promising Calum Chambers from the much-vaunted Southampton academy.

However, there remains a nagging feeling that Arsenal are still not maximising their potential or making use of their bountiful financial resources, as the squad still looks worryingly thin in defence, while the need for a powerful presence in midfield seems obvious to all but the most stubborn. The supporters’ concerns were hardly eased by last week’s feeble capitulation to a rampant Borussia Dortmund side in the aforementioned Champions League.

Arsenal’s accounts once again emphasised the club’s financial strength, as revenue exceeded £300 million while the club reported a profit for the 12th year in a row, another amazing achievement. Although the profit before tax of £4.7 million was virtually unchanged from the previous year’s £6.7 million, the way that the club reached this profit figure was very different.

Revenue from football activity surged £56 million (23%), largely thanks to the new Premier League TV deal, which was worth an additional £36 million, plus increasing commercial income (up £15 million), mainly due to including a full year of the extended Emirates sponsorship deal, and £7 million higher match day income, driven by three more home games.

This offset a £12 million increase in the wage bill (up to £166 million) and a significant £40 million reduction in profit from player sales from £47 million to £7 million. The only meaningful money generated this season came from the sales of Gervinho to Roma and Vito Mannone to Sunderland, while last year’s accounts included the far more lucrative departures of Robin van Persie to Manchester United and Alex Song to Barcelona.

"Don't Let Me Be Misunderstood"

Player amortisation (the annual cost of expensing transfer fees) was around the same level at £40 million, but profits were boosted by no player impairment (reducing the carrying value of players in the accounts) this season compared to £6 million in 2012/13.

Other operating expenses rose £8 million to £70 million, partly due to an increase in revenue-related costs, such as staging more games at the Emirates and supporting commercial partnerships.

Profit after tax for 2013/14 was £7.3 million, mainly thanks to a net £2.6 million tax credit linked to the reduction in the corporation tax rate to 20% from April 2015, thus reducing the club’s deferred tax liabilities. That’s fairly technical, but it’s basically good news.

Of course, it’s not unusual for Arsenal to report a profit. In fact, the last time that the club made a loss was way back in 2002, a virtually unparalleled feat in the world of football where most success is effectively bought. Every now and then we see an exception, such as Atletico Madrid’s glorious efforts last season, but the normal rule is that money talks. In Arsenal’s case, they have made combined profits of over £200 million in the last seven years.

The Premier League accounts for the 2012/13 season amply demonstrate how rare this is, as only eight clubs made money, while many others reported massive losses. Of particular interest to Arsenal would have been the figures registered by those clubs that finished above Arsenal in the league table with Manchester City, Chelsea and Liverpool all losing around £50 million.

That said, Manchester United’s 2013/14 results highlight that Arsenal still have a long way to go to compete on a level playing field with the financial elite. As Arsenal’s football revenue approaches the £300 million level, United are already generating a hefty £433 million, i.e. an additional £133 million every season, and that’s before United’s spectacular £750 million adidas deal, which only commences in August 2015.

So what, you might say, but here’s the thing: this ability to throw off cash allowed United to spend £215 million on wages, which is £48 million more than Arsenal – and they still reported a much higher profit before tax of £24 million (£17 million higher than Arsenal). The majority of right-thinking football fans would not endorse the Glazers’ approach to owning a football club, but without the interest payments arising from their leveraged buyout (£27 million last season) United’s spending capacity would be even higher. You can’t rely on the Moyes effect every year.

What is encouraging for Arsenal is that they are no longer so reliant on player sales or property development to make money, so the core business is improving. In previous years, much of the club’s excellent financial performance has been down to profits from player sales (e.g. £65 million in 2011/12, £47 million in 2012/13) and property development (e.g. £13 million in 2010/11, £11 million in 2009/10).

Excluding those once-off factors would have meant that Arsenal actually made substantial losses in the previous two years: £31 million in 2011/12 and £45 million in 2012/13. This is now down to a far more manageable £3 million loss in 2013/14.

Arsenal’s role as a pseudo property developer is largely coming to an end with turnover down to £3 million, compared to £38 million the previous season, which included the sale of the major site at Queensland Road.

The improvement in the football business last season is clearly shown by the recovery in operating profit. This had been steadily declining since 2009 with the club actually reporting operating losses of £18 million in 2011/12 and a worrying £33 million in 2012/13, but last season they produced operating profit of £10 million.

However, this accounting profit includes non-cash items, such as player amortisation, depreciation and impairment of player values. If we add these back, we get yet another form of accounting profit, namely EBITDA (Earnings Before Interest, Depreciation and Amortization). This metric has its critics with the legendary investor Warren Buffett once cautioning, “References to EBITDA make us shudder. It makes sense only if you think that capital expenditure is funded by the tooth fairy.” That said, it is a useful proxy for reviewing a club’s operating cash flow.

On that basis, Arsenal’s EBITDA more than doubled to a highly impressive £62 million last season. On the one hand, this is still less than half of Manchester United’s £130 million, but on the other hand it is considerably higher than any other club in the Premier League (in 2012/13 the next highest was Manchester City with £36 million).

Of course, Arsenal benefit from higher revenue than most other clubs, though they fell to 8th place in the Deloitte Money League for the 2012/13 season, as they were overtaken by the nouveaux riches of Paris Saint-Germain and Manchester City, both boosted by large commercial deals with the Qatar Tourism Authority and Etihad Airways respectively.

Gazidis has been quoted as saying, “Our revenues will grow to put us into the top five revenue clubs in the world”, which is unlikely to happen this season, as revenue also continues to grow at those clubs above Arsenal in the Money League. In particular, Real Madrid, Barcelona and United have all reported higher revenue for the 2013/14 season. For the 2014/15 season Arsenal’s revenue will again rise due to the new PUMA kit deal, but the other main driver, namely the new Champions League deal, will also help the other clubs.

The most important revenue stream at Arsenal is Broadcasting at £121 million, which has overtaken Match Day (£100 million) for the first time since 2001. In fact, despite the advances made commercially, this revenue stream still lags the others at £77 million. Over the last 5 years, Match Day income is flat, while the growth drivers have primarily been Broadcasting, which is up 65% (£48 million) due to central TV deals (Premier League and Champions League), and Commercial income, which is up 60% (£29 million) mainly due to the new Emirates shirt sponsorship.

Arsenal’s TV money increased by £36 million in 2013/14, almost entirely due to the new Premier League deal, which saw Arsenal’s share rise by £36 million from £57 million to £93 million. This increase is akin to the old aphorism, “a rising tide lifts all boats”, as every Premier League club benefits from this deal. That said, it still helps to be higher up the league table, as the top club’s increase was £40 million (£57 million to £97 million), while the bottom club “only” received an increase of £21 million (£41 million to £62 million). Arsenal also received more facility fees for featuring in more televised live games (25 compared to 22).

In contrast, Arsenal received less money from the Champions League: €27 million (vs. €31 million) from the group stages onwards, as their share of the TV market pool was lower (due to finishing lower in the Premier League during the qualifying season and other English clubs progressing further in the Champions League).

Nevertheless, the value of Champions League qualification is clear, especially when looking at the Media revenue from the 2012/13 season, where the four entrants earn significantly more than the other Premier League clubs.

Indeed, the most earned by an English club in the Europa League was Tottenham’s €6 million. The rewards (and differential) are even more pronounced for the tournament winners: Champions League €57 million vs. Europa League €15 million.

This effect will be even more pronounced from the 2015/16 season when the new Champions League deal commences. UEFA recently told the European Club Association that clubs could expect a 30% increase in revenue, but the uplift may be even higher for English clubs, as BT’s exclusive acquisition of UK rights is double the current arrangement.

Although the growth in Match Day income was only £7 million, the £100.2 million was the highest ever reported by Arsenal, slightly higher than the £100.1 million in 2008/09. The increase was largely due to 3 more home games (2 in the FA Cup and 1 in the Champions League), though the Emirates Cup also returned after a break in 2012 for the London Olympics.

The Emirates stadium might not have the same atmosphere as Highbury, particularly for those of my generation, but it has certainly been a financial triumph. In fact, only Manchester United, Real Madrid and Barcelona generate more money from Match Day income than Arsenal. All of this makes the decision to raise ticket prices by 3% seem misguided at best, plain greedy at worst.

Commercial revenue has long been Arsenal’s Achilles heel, as the figures from the Deloitte Money League clearly demonstrate. Even the 2013/14 increase from £62 million to £77 million still leaves Arsenal back in 12th place and looks low compared to other leading clubs. OK, the likes of Paris Saint-Germain £218 million and Manchester City £143 million may benefit from “friendly” deals, but Arsenal are also way behind Bayern Munich £203 million, Manchester United £189 million, Real Madrid £181 million and Barcelona £152 million.

Arsenal’s £15 million increase this season is very largely due to the extended partnership contract with Emirates, which benefited from 12 months in 2013/14, as opposed to only 6 months in the previous season. Against that the club’s retail business was held back in the second half of the financial year by lower available stocks of replica kit as part of the planned transition from Nike to PUMA.

The club’s press release made great play of commercial revenues rising by “more than 70%” since 2009, but that excluded the retail business. Once this is combined to give total commercial income, the rise is more like 60%. That still sounds pretty good until you realise that this is essentially a par performance with other clubs growing their commercial at a similar rate, while the commercial colossus that is Manchester United has grown its revenue by 171% in the same period with a veritable plethora of secondary sponsors (surely Arsenal’s next area to be targeted).

Arsenal have already done pretty well with the new deals for shirt sponsor and kit supplier. Although these are notoriously difficult to compare, as they are rarely formally reported and contain many clauses based on success on the pitch, sales targets, exchange rates, etc, it is clear that Arsenal’s deals are among the best worldwide.

In fact, I reckon that only Manchester United’s Chevrolet deal ($70 million or £43 million a year) is higher than Arsenal’s Emirates deal. The £150 million contract covers a 5-year extension in shirt sponsorship from 2014 to 2019 plus a 7-year extension in stadium naming rights from 2021 to 2028. This represents a significant improvement over the former deal: £90 million for 8 years shirt sponsorship plus 15 years stadium naming rights. The club has not divulged how much of the deal is for naming rights, so I have taken the straightforward £30 million annual figure, though my own estimate would put the pure shirt sponsorship at around £26 million, which would still be pretty good.

The PUMA kit deal only starts from 1 July 2014, so is not included in the latest P&L figures. This is again worth £150 million over 5 years, so £30 million a year, which will represent a £22 million increase over the former Nike deal. This is still dwarfed by Manchester United’s new £750 million 10-year deal with adidas that starts from the 2015/16 season, though this would be reduced by 30% if United fail to participate in the Champions League for two or more consecutive seasons (starting with the 2015/16 season).

There’s an old saying that “it’s an ill wind that blows no good” which applies to Arsenal’s relatively poor commercial performance to date. The new Premier League Financial Fair Play regulations restrict the amount of money clubs can spend from the new TV deal on wages. Specifically, clubs whose total wage bill is more than £52 million will only be allowed to increase their wages by £4 million per season for the next three years. However this restriction only applies to the income from TV money, so Arsenal’s additional money from the new sponsorship deals can still be spent on wages.

Arsenal’s wage bill increased by 8% (£12 million) from £154 million to £166 million, largely due to the revised, improved contracts for existing players, notably the “Brit Pack” (Wilshere, Walcott, Gibbs, Oxlade-Chamberlain, Ramsey and Jenkinson) plus the package required to lure Mesut Özil. Despite this increase, the wages to turnover ratio has actually fallen from 64% to 56%, thanks to the higher revenue growth.

It is clear from the trend how much attention Arsenal pays to the relationship between wages and revenue. In fact, in the last 5 years the growth has almost been hand-in-hand, as wages growth of £62 million has been covered by revenue growth of £74 million. If the club is to maintain a “safe” ratio of 60%, that would imply a wage bill of £192 million on annual revenue of £320 million (easily achievable once the PUMA increase is factored in), so the club still has plenty of room to manoeuvre.

That would still be lower than the last reported wage bills of Manchester City £233 million and Manchester United £215 million, but would be more than Chelsea’s £173 million and Liverpool’s £133 million. What will be particularly interesting is the impact that FFP has on clubs like Manchester City, who admitted this was the reason they loaned Negredo to Valencia in the summer,  and Chelsea, whose wage bill seems to have stalled and whose manager Jose Mourinho can (incredibly) now be counted among its fiercest exponents – at least when discussing City.

Enough of the profit and loss account, the main financial topic on the lips of Arsenal fans these days is that huge cash balance. Guess what? It’s gone up again, rising another £55 million in the last 12 months from £153 million to £208 million. For some reason the club’s headline statement insists on reporting this as net of debt service reserves of £35 million, giving the widely reported figure of £173 million, but the actual cash balance is indeed north of £200 million.

To place that into context, the next highest cash balances in the Premier League in the 2012/13 season were Manchester United £94 million, Chelsea £26 million and Southampton £14 million. Since then, United’s 2013/14 balance has come down to £66 million, so Arsenal’s cash balance really is in a class of its own, over three times as much as the next highest figure.

Of course, this figure is a bit misleading and not all of this cash balance is available to spend on transfers. In fact, this is so important that I’m going to say it again: not all of the £208 million cash is a transfer fund.

This is due to many factors, including the fact that most season ticket renewals are paid in April and May, so Arsenal’s cash balance will always be at its highest when its annual accounts are prepared, namely 31 May.

In addition, there’s that annoying debt service reserve, which has been around since the 2006 bond agreements, though it does raise the question of whether these arrangements could be renegotiated given Arsenal’s strong financial record, thus freeing up this £35 million.

The club also has to pay a good proportion of its annual running expenses out of this cash, though other money will flow into the club during the course of the season, such as TV distributions and merchandise sales and the fact remains that year after year the cash balance has steadily risen: May 2007 £74 million, May 2008 £93 million, May 2009 £100 million, May 2010 £128 million, May 2011 £160 million, May 2012 £154 million, May 2013 £153 million and May 2014 £208 million.

"Calum Chambers - Young Guns (Go For It)"

However, there are a couple of reasons why we still need to be cautious with the cash figure. First, the club clearly stated that the cash impact of the £64 million invested in new players during the accounts period has been partially offset by the credit terms agreed with the vendor clubs. In other words, Arsenal have not paid all the cash upfront, but (sensibly) agreed stage payments, so part of the cash balance has to be reserved to pay sums due on those transfers. This is reflected in the £53 million increase in creditors falling due within one year from £150 million to £203 million.

Similarly, as these accounts were closed on 31 May, that means that they do not take into consideration this summer’s transfer activity, so another £50-60 million should be deducted from the reported cash balance.

On the other hand, Arsenal may well still be owed money from sales of players to other football clubs, e.g. other debtors included £26 million in respect of player transfers as at May 2013.

"Welbz is Dat Guy"

In addition, the club has so-called contingent liabilities, where payments are made to a player’s former club based on certain conditions being met, e.g. number of first team appearances, trophies won, international caps, etc. These amounted to £7 million in the 2012/13 accounts, but are by no means certain to be paid – that’s why they are described as “contingent”.

There are other once-off factors that have helped inflate Arsenal’s cash balance, such as property development, e.g. £20 million has come from the Queensland Road site in the last two years, and upfront payments from the new sponsorship deals with Gazidis stating that Emirates provided additional money in advance last financial year in order that it could be invested.

In short, without knowing all of the internal details, it’s a mug’s game trying to predict how much Arsenal genuinely have available to spend. It’s clearly not as much the £200 million in the books, but we can say with some conviction that there would be enough available in the January transfer window to cover the glaring weaknesses in the squad, let’s say £40-50 million.

Looking at Arsenal’s cash flow statement, we can see signs of a change in approach: in the six seasons between 2007 and 2012 Arsenal spent just a net £4 million on player purchases, while they have spent a net £37 million in the last two seasons. Baby steps for sure, but steps in the right direction.

That said, most of the money still goes elsewhere. In 2013/14 Arsenal generated an impressive £96 million from operating activities, spending £11 million on transfers, £19 million on financing the Emirates Stadium (£12 million interest plus £7 million on debt repayments), £9 million on capital expenditure (e.g. refurbishment of Hale End youth facilities) and £2 million on tax. What happened to the remaining £54 million? Nothing really, as it just went towards increasing the cash balance.

This is nothing new. Since 2007 Arsenal have produced a very healthy £526 million operating cash flow – that’s over half a billion. It’s instructive how Arsenal have used this spare cash, spending £89 million on capital expenditure, £135 million on loan interest, £77 million on net debt repayments and £12 million on tax. Only 8% (£41 million) of the available cash flow has been spent in the transfer market, though almost all of that has been in the last two seasons. The other notable “use” of cash in that period is to obviously increase the cash balance, which has risen by £172 million.

Clearly the debt incurred for the new stadium continues to have an influence over Arsenal’s strategy. Although this has come down significantly from the £411 million peak in 2008 to £240 million, it is still a heavy burden, requiring an annual payment of around £19 million, covering interest and repayment of the principal.

Although the net debt stands at only £33 million, thanks to those large cash balances, the gross debt of £240 million remains the second highest in the Premier League, only behind Manchester United, who still have £342 million of debt even after all the Glazers’ various re-financings. Arsenal’s debt comprises long-term bonds that represent the “mortgage” on the stadium (£213 million) and the debentures held by supporters (£28 million).

Looking at the player trading over the last few years, we can see that the club is beginning to walk the talk, as there has been a noticeable change in the last three seasons with Arsenal no longer primarily a selling club. In that period the club’s net spend was £95 million, which is in marked contrast to the net sales of £49 million in the previous six seasons.

There’s no doubt that this parsimonious approach has put Arsenal at a competitive disadvantage, exacerbated by the arrival of foreign ownership with significant financial firepower. In fact, after the arrival of Roman Abramovich at Chelsea, Arsenal have been heavily outgunned. Since the 2003/04 season, Chelsea and Manchester City have both splashed well over £500 million, while Arsenal were restricted to just £70 million. They were even outspent by their North London neighbours, Tottenham (with £100 million), for heaven’s sake.

But, as Bob Dylan said, the times they are a-changing. In the last two seasons, Arsenal have spent a net £86 million, only just short of Manchester City’s £114 million, but ahead of Chelsea and Liverpool. Manchester United are the new big spenders, as Louis van Gaal attempts to build a new team following the Moyes experiment (and Alex Ferguson’s retirement).

To sum up Arsenal’s financial condition, we could do a lot worse than quoting Ivan Gazidis: “The club is in excellent shape, both on and off the pitch”, adding that “we are well placed to deliver.” That is undoubtedly true.

While not expecting a club like Arsenal to suddenly adopt a “balls out, pedal to the metal” attitude, it is clear that something has changed in Arsenal’s ability (and willingness) to spend.

In the past there has been more money available than the club has utilised, but 2014 was always going to be the year of major change, as the commercial deals were re-negotiated and the new TV deal came on line. The big question is whether the additional money will make enough of a difference on the pitch to take the club to the next level. Over to you, Arsène.

Monday, August 12, 2013

Arsenal - Money Don't Matter 2 Night

Arsenal’s transfer strategy this summer has left the vast majority of their fans perplexed. While the seemingly interminable Luis Suarez saga has grabbed most of the attention, allied with the failure to secure Gonzalo Higuain when the deal appeared done and dusted, the stark reality is that Arsenal have not bought anybody yet, let alone the marquee signing that the supporters crave. Yes, they have acquired the services of French U20 international, Yaya Sanogo, but he arrived on a free transfer from Auxerre in the French second division..

At the same time, there have been many departures from the Emirates, including the likes of Gervinho, Mannone, Arshavin, Djourou, Coquelin, Santos and Chamakh plus a veritable plethora of youth team players. Although most of these individuals did not feature a great deal in the first team last year, leading to the unfortunate “deadwood” label, it’s still a fair amount of experience for the squad to lose with no replacements coming in.

In fairness, Arsenal’s excellent run in the latter stages of last season was pretty encouraging, though the final Champions League spot was only secured in a nerve-jangling final game of the season, when Arsenal beat Newcastle 1-0 away from home (to the apparent astonishment of Lord Sugar, who, quite brilliantly, imagined a non-existent equalising goal from the Toon Army).

"I wanna dance with Koscielny"

Although Arsenal performed creditably, the fact is that they never threatened a challenge in the major competitions and were dumped unceremoniously out of the domestic cups by lower league opposition. Therefore, the need to strengthen was obvious to all and sundry. A couple of injuries to key players would highlight the threadbare nature of the squad, which would then have to rely on youngsters, who may well be talented, but are untested in the heat of battle, pre-season friendlies not being the best indicator.

As INXS once said, it’s enough to mystify me, especially given the bullish comments from Ivan Gazidis in June. Ah, those heady days of (early) summer, when Arsenal’s chief executive boasted, “This year we are beginning to see something we have been planning for some time, which is the escalation in our financial firepower.” He continued, “We have a certain amount of money which we’ve held in reserve. We also have new revenue streams coming on board and all of these things mean we can do some things which would excite you.”

But specifically what could this mean? For example, could Arsenal now pay a £25 million transfer fees and wages of £200,000 for one world class player? Gazidis pulled no punches, “Of course we could do that. We could do more than that.”

And he’s not kidding. When you look at the club’s cash balances – there in black and white in the accounts for all to see – Arsenal’s spending capacity is evident.

As at the end of the 2011/12 season (the latest year when football clubs have published their accounts), Arsenal had an incredible £154 million of cash, which is significantly higher than any of their competitors with Manchester United the closest with £71 million (less than half the Gunners’ cash pile). An even more amazing statistic is that Arsenal have almost as much cash as the rest of the Premier League’s other 19 clubs combined (£181 million).

The story is little different on the continent, where Europe’s leading clubs also retain less cash than Arsenal, preferring to invest most of their available funds into the squad. As might be expected, the financially astute Bayern Munich had £95 million, while, perhaps more surprisingly, Real Madrid had almost as much with £94 million – though both these clubs still held around £60 million less than Arsenal. Barcelona had much less cash at £31 million, while clubs with smaller revenue generation, like Borussia Dortmund and Juventus, were barely in the black with £4 million and £1 million respectively.

Although the club has only really started beating its chest about its financial strength this year, it has been obvious for a while that the club could have spent big. As far as back as 2005, former chief executive Keith Edelman observed, “There are sufficient funds available to the manger for transfers”, before upping the ante a couple of years later, “We have got plenty of financial firepower to make the transfers Arsène wants to make. We had over £70 million of cash at the end of the year and if Arsène wants to spend that money, we will make it available.” Sound familiar?

Gazidis has been singing from the same song sheet as his predecessor ever since his arrival, claiming that “The resources are there. We’ve got a substantial amount of money that we can invest”, before his now infamous comment about the club keeping its “powder dry” for future player investment. Although he made this sound like some sort of grand plan from the club, its cunning appeared to be of the variety that would only have been recognisable to those who appreciated Baldrick’s schemes in Blackadder.

There has been a steady upward trend over the last few years in Arsenal’s cash balances, which have grown from £74 million in 2007 to £154 million in 2012. The figure of £123 million announced at the Interims in November 2012 was lower, but this merely reflects the seasonal nature of cash flows during the year, e.g. the May balance will always be high following the influx of money from season ticket renewals, while November is lower as annual expenses, notably wages, are paid. However, the rising trend can be seen by the fact that November 2012 figure was £8 million higher than the previous year.

However, this does highlight the fact that not all of Arsenal’s cash balance is available for transfers. It’s not quite that simple, due to many factors, including the need to pay those pesky expenses.

Of course, other money will also flow into the club during the season, such as TV distributions and merchandise sales, though not all of the reported revenue is necessarily converted into cash, e.g. all of the £55 million from Nike’s initial seven-year kit supply deal from 2004 to 2011 had been paid by July 2006 (to help with financing the construction of the Emirates Stadium).

The debt incurred for the new stadium continues to have an influence over Arsenal’s strategy. Although Gary Neville, amongst others, may believe that this is no longer an issue, it is clearly a factor with Arsenal’s gross debt standing at £253 million at the end of 2011/12, comprising long-term bonds that represent the “mortgage” on the stadium (£225 million) and the debentures held by supporters (£27 million). In fact, only Manchester United have a higher debt in the Premier League as a result of the Glazer family’s highly leveraged takeover.

Although this has come down significantly from the £411 million peak in 2008, it is still a heavy burden, requiring an annual payment of around £19 million, covering interest and repayment of the principal.

Despite the high interest charges, it is unlikely that Arsenal will pay off the outstanding debt early. The bonds mature between 2029 and 2031, but if the club were to repay them early, then they would have to pay off the present value of all the future cash flows, which is greater than the outstanding debt. In any case, the 2010 accounts clearly stated, “Further significant falls in debt are unlikely in the foreseeable future. The stadium finance bonds have a fixed repayment profile over the next 21 years and we currently expect to make repayments of debt in accordance with that profile.”

Importantly, as part of the bond agreements, Arsenal have to maintain a debt servicing reserve, which was £24 million in the Interims. In plain English, this portion of the cash balance is not available to spend on new players. Similarly, Arsenal also have to maintain a small reserve that is restricted to use for property development, but that is only £1 million.

Speaking of property development, Arsenal’s interims mentioned that they would be getting an additional £20 million of cash from Queensland Road, though this would be “receivable in instalments over a two year period.” There should also be more money from the two remaining “smaller projects” on Hornsey Road and Holloway Road, which could be worth another £20 million (estimate), depending on planning permission.

"We have a rather large German"

The amount of cash available is also influenced by outstanding transfer fees, though this is not a major issue for Arsenal at the moment: in the Interims Arsenal owed other clubs £31.6 million, but were in turn owed £31.4 million by other clubs, so this basically netted out.

In addition, the club has so-called contingent liabilities, where payments are made to a player’s former club based on certain conditions being met, e.g. number of first team appearances, trophies won, international caps, etc. These amounted to £7.8 million in the Interims, but are by no means certain to be paid – that’s why they are described as “contingent”.

Finally, at least in terms of transfer activity, we would have to add in the net funds from the last two windows, but again this is not a particularly large factor. This summer, Arsenal have raised around £10 million from the sales of Gervinho to Roma and Vito Mannone to Sunderland, but they paid out £8 million to Malaga in January for Nacho Monreal, producing a positive net impact of £2 million.

The new £150 million commercial deal with Emirates (shirt sponsorship and stadium naming rights) will have an impact, even though it does not commence until 2014, with talk of up to £30 million being frontloaded. Indeed, Gazidis explicitly stated, “We’ll have additional money this financial year, which will be available to invest in the summer.”

He added, “The deal is all about football, it’s all about giving us the resources to be able to invest in what we put on to the field for our fans.” To which, the response that comes to mind is “actions speak louder than words”.

Gazidis also said, “Our revenues will grow to put us into the top five revenue clubs in the world”, which was somewhat confusing, given that Arsenal have been fifth highest in the Deloitte Money League in four out of the last six years, ever since the move to the Emirates stadium. They were overtaken by Chelsea last season, mainly due to their fellow Londoners’ Champions League triumph, i.e. a direct result of success on the pitch.

In truth, Arsenal have benefited from higher revenues than the vast majority of other clubs for many years. Their £235 million turnover was the third highest in England in 2011/12 and is likely to rise to more than £300 million in two years time. The aforementioned Emirates sponsorship is more than £20 million higher than the current deal, as is the new Puma kit 2014 supply deal (widely reported, though not yet officially confirmed), while the astounding new Premier League 2013/14 TV deal should generate at least £30 million more for a top four club.

In addition, most transfers are funded by stage payments, so Arsenal would not necessarily need to find all the cash upfront – though other clubs, aware of the North Londoners’ resources, may insist on most being paid immediately. In that sense, Arsenal are victims of their own financial success.

Furthermore, Arsenal could always “speculate to accumulate” by taking on some additional short-term borrowing, which should be no problem, given the strength of the balance sheet and future cash flows. I’m not saying that this would be advisable (or even necessary), but it would be a possibility.

So, what is the magic figure Arsenal have as a transfer fund? Given all of the variables described above, it's safest to quote David Bowie, "It ain't easy", when trying to pin this down, but the oft-quoted £70 million is a reasonable estimate. If funds from property development and future commercial deals are also made available, then it could be as high as £100 million.

Arsenal have long been considered the poster child for financial success, consistently reporting large profits. Not only did they register the highest profit before tax (£37 million) in the Premier League in 2011/12, but they have also made an incredible £190 million of profits in the last five years. In fact, the last time that the club made a loss was a decade ago in 2002. This is virtually unparalleled in the cutthroat world of professional football.

However, the headline figures do not tell the whole story, as much of this excellent performance has been down to profits from player sales (e.g. £65 million in 2011/12) and property development (e.g. £13 million in 2010/11). Excluding those once-off factors would mean that Arsenal actually made losses in the last two years: £4 million in 2010/11 and an apparently worrying £31 million in 2011/12.

In fact, the operating profit from the football business has been steadily declining since 2009 with the club actually reporting an operating loss of £16 million last season.

So that explains Arsenal’s reluctance to splash the cash?

Not so fast, big boy, there’s another layer of complexity to add here, as the accounting profit includes non-cash items, such as player amortisation, depreciation and impairment of player values. Without wishing to get overly technical, we need to add these back to the operating profit and then make an adjustment for working capital movements to get the cash profit.

Once we do that, Arsenal’s cash flow from operating activities was an impressive £28 million in 2011/12, a figure that was only bettered by two clubs in the Premier League. The problem is that Arsenal have spent very little of this on improving their squad: that season the net expenditure on player purchases was just £2 million – with only four clubs spending less than the Gunners.

Most of the available funds instead went towards financing the Emirates Stadium: £13 interest and £6 million on debt repayments. A further £9 million was invested in fixed assets for enhancements to Club Level, more “Arsenalisation” of the stadium and new medical facilities and pitches at the London Colney training ground.

Since 2007 Arsenal have generated a very healthy £376 million operating cash flow. Although they had a small negative cash flow of £7 million in 2011/12, this followed many years of positive cash flow, e.g. 2010/11 £33 million, 2009/10 £28 million, 2008/09 £6 million, 2007/08 £19 million and 2006/07 £38 million.

However, it’s instructive how Arsenal have used this spare cash. They have spent £71 million on capital expenditure, £110 million on loan interest and £64 million on net debt repayments. Astonishingly, only 1% (one per cent) of the available cash flow has been spent in the transfer market. Although Arsenal have laid out a fair bit of cash on buying players in the last couple of seasons (over £100 million), this has been more than compensated by big money sales, leaving a negative net spend.

The other notable “use” of cash in that period is, er, nothing, as cash balances have risen by £118 million.

That begs the rather obvious question: why not spend the cash? There’s no one magic answer to this, but let’s take a look at the usual arguments:

(a) Impact of new signings on the wage bill

One point that people often raise when discussing the transfer fund is that it would also have to fund a new signing’s wages, so if the club bought a player for £25 million on a five-year contract at £100,000 a week, that would represent a commitment of £50 million. That is undoubtedly true, but it is a little disingenuous, as it ignores the fact that this could be at least partially offset by the departure of existing players. This is particularly true this summer, when Arsenal have offloaded so many players.

There is no doubt that the rising wage bill has been a cause for concern at Arsenal. Since 2009 wages have grown by 38% to £143 million, while revenue has only increased by 5% in the same period – though this is where the commercial department could be justifiably criticised for their failure to add secondary sponsors. The wage bill will have increased again in 2012/13 following revised contracts for the “Brit Pack” (Wilshere, Walcott, Gibbs, Oxlade-Chamberlain, Ramsey and Jenkinson) to over £150 million.

On the other hand, there will be plenty of room going forward, as the growth in revenue to £300 million implies a sustainable wage bill of £180 million (representing a safe 60% wages to turnover ratio). To place that into context, Chelsea’s current wage bill is £176 million, while Manchester United’s is £162 million, leaving only Manchester City out of sight at £202 million.

However, these clubs might be impacted by the new Premier League regulations, which have restricted the amount of money clubs can spend from the new TV deal on wages. Specifically, clubs whose total wage bill is more than £52 million will only be allowed to increase their wages by £4 million per season for the next three years. However this restriction only applies to the income from TV money, so Arsenal’s additional money from the new sponsorship deals can still be spent on wages.

(b) Cover a potential failure to qualify for the Champions League

Many have speculated that Arsenal may be holding cash back as a “rainy day” fund to cover a revenue shortfall from any failure to qualify for the Champions League. This has been a lucrative source of funds for Arsenal, who earned €31 million in 2012/13 from the TV distribution alone, but Gazidis himself has quashed this theory many times, most recently in June, “The Champions League qualifier in August won’t affect our plans. It’s never been an issue when we’ve discussed with players before and it doesn’t affect our planning.”

(c) Players not available

One of the most fundamental laws of economics is the one relating to supply and demand and that is relevant here. In other words, it does not matter if you have money, if there aren’t any quality players to buy. Gazidis referred to this in his June interview, “It doesn't only require our decision, it requires the player’s decision and other clubs' decisions, so there is a market that has to move not just dependant on one party, but dependant on a number of parties and many of those parties have been in a period of uncertainty.”

That’s perfectly valid, but has not prevented other clubs doing business, e.g. Manchester City have already bought Stevan Jovetic, Fernandinho, Jesus Navas and Alvaro Negredo, while Spurs have acquired Paulinho, Roberto Soldado and Nacer Chadli.

Less justifiable was Wenger’s complaint that “Some clubs acted very early so the choices were reduced”, as if the transfer window were some kind of handicap race and those clubs had been given a head start.

"Cavani - the price is not right"

(d) Valuations are too high

Nobody wants to over-pay, but this is where Arsenal’s cash-rich position should work to their advantage. There’s no point in having more money than most other clubs if you don’t make it work for you. As an analogy, Arsenal may not have quite enough funds to buy in Harrods, but they could comfortably afford to shop in Waitrose, instead of wasting time haggling in Aldi.

Some have argued that Gazidis did Arsenal no favours with his “loadsamoney” speech, but, while this might have weakened the club’s negotiating stance, it is difficult to believe that executives at other clubs were not already aware of the Gunners’ financial position.

"Olivier's Army"

(e) Other clubs willing to spend more

Even if Arsenal are well positioned, some clubs still have more cash to spend. As Gazidis said, “I can’t compete with somebody who has an unlimited budget.” This echoed the thoughts of former chairman Peter Hill-Wood, who lamented, “At a certain level, we can’t compete.”

Fair enough, that’s certainly true, especially with the arrival of Paris Saint-Germain and Monaco on the scene – “more competition coming from France”, as Wenger drily observed. However, that still does not explain why the likes of Manchester United, Liverpool and Tottenham have outspent Arsenal in recent years.

(f) Implications for Financial Fair Play

Under FFFP, UEFA will look at aggregate losses, initially over two years for the first monitoring period in 2013/14 and then over three years, so Arsenal’s recent record of large profits would hold them in good stead, even if they were to temporarily slip into losses before the new revenue streams came on board. In addition, certain costs such as depreciation on fixed assets, stadium investment and youth development can be excluded from the break-even calculation, so this should not be a problem.

In fact, Arsenal hope that UEFA’s FFP regulations will reward their prudent approach, as these aim to force clubs to live within their means, thus restricting the ability of benefactor-funded clubs to spend big on players. Indeed, Gazidis stated that the advent of FFP meant that “football is moving powerfully in our direction.”

"You make me feel (mighty Monreal)"

(g) Lack of a proper transfer structure

As Monaco’s former chief executive, Tor-Kristian Karlsen, noted, when commenting on Manchester City and Tottenham’s transfer activity this summer: “I for one doubt it's a coincidence that the only two teams in the Premier League with genuine sporting directors (or technical directors or directors of football, if you like) are the ones who have appeared the most prepared, structured and with clear strategies in their work in the summer transfer market.”

If there is a modern, coherent transfer structure in place at Arsenal, then it seems remarkably well hidden. There may well be a great deal of activity behind the scenes, but the results speak for themselves.

(h) Will be used to pay dividends to the owner

Although the club’s owner, Stan Kroenke, has no record of taking dividends from his numerous sports clubs, there is still suspicion among some sections of the support that his game plan for Arsenal includes this possibility. When Kroenke was asked at the 2012 Annual General Meeting whether he intended to take dividends out of Arsenal, his response was hardly unequivocal, as he merely said that it was a decision for the board.

He added, “I have never said in any meeting that money wasn't available” and “our goal is to win trophies”, but the feeling remains that he is content with the status quo of fourth place in the Premier League, while topping the unofficial table for cash balances.

"Kroenke - the sound of silence"

(i) Makes it easier to sell the club

Having such a high cash balance obviously strengthens the balance sheet, but the club would arguably fetch a bigger price if it were successful. Moreover, most investors in football teams do not appear to be greatly interested in a financial return. Kroenke himself has said, “The reason I am involved in sport is to win. It's what it's all about. Everything else is a footnote.”

Indeed, if we look at this purely from the financial perspective, there is also the opportunity cost of not investing, as this reduces the chance of success on the pitch. As the presentation of the bond prospectus in 2006 put it, “the move to the Emirates Stadium should increase revenues and the ability to sustain a better playing squad – a virtuous circle.”

Gazidis echoed these thoughts in the summer, “you need the financial platform in order to create the sporting success, but you need the sporting success in order to supply the financial platform as well.”

This is why the bond structure includes a Transfer Proceeds Account, which had the objective of ensuring a high quality playing squad. This states that 70% of net player sales proceeds must be reinvested in players, but (crucially) also “other football assets or prepayment of debt”.

Regardless of how that account has been used, Arsenal’s cautious approach has cost them money. The TV distribution in the Premier League is relatively egalitarian with each place only worth an additional £0.8 million, but there is a significant upside in the Champions League, best seen in the 2011/12 season when Arsenal received €28 million for reaching the last 16, while Chelsea earned €60m for winning the competition.

In addition, a relative lack of success on the pitch cannot have helped Arsenal’s commercial team when they have tried to secure new deals. We already know that the new shirt sponsorship deal contains a number of clauses relating to performance, e.g. if Arsenal were to fail to qualify for the Champions League, the £150 million headline figure (over five years) would be somewhat less.

"Gazidis - brave boys keep their promises"

The other logical result of Arsenal’s many years of reported profits is that they are one of the few Premier League clubs that pay corporation tax: £4.6 million last season (the highest in the league). From a community aspect, this is a noble thing, but it is money that could have helped fund a new striker.

This is not a question of whether Arsenal have under-performed or not. Most neutral observers would agree with Gazidis’ assertion that “We have outperformed our spend, in virtually any metric you can look at, consistently for the last 15 years.” You can agree with that opinion, while still being unhappy that the club has not made the best use of its resources.

Arsenal are by no means a poor side, as they have shown in some encouraging pre-season displays, including a win against Manchester City, but they will find it difficult to maintain any sort of title challenge without strengthening. Obviously, there is still time to make important signings before the transfer window closes, but that’s not really the point, as the season will be well underway before Jim White embarrasses himself on Sky Sports News, including two Champions League qualifiers and the North London derby.

"Oh, Mickey, you're so fine"

No Arsenal supporter in his right mind would want the club to “do a Leeds”, but they are a considerable distance from that nightmare scenario. Equally, nobody should expect the promised big spending to guarantee an end to the recent trophy drought, but it would give the club the best opportunity to compete for honours, especially at a time when their main rivals have all gone through various degrees of management upheaval: nothing ventured, nothing gained.

At the very least, it would provide some substance to Gazidis’ statements that Arsenal are “extraordinarily ambitious” and “ready to compete with any club in the world”. As the well-known Arsenal fan, Spike Lee, once said, it’s time to “Do the right thing.”
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