Come with me, if you will, back to the beginning of this season, a time when most pundits graced us with their opinion that Arsenal were the club most likely to drop out of the top four positions in the Premier League, having spent very little and sold two of their established stars. With the team now virtually assured of third place, you would therefore think that this was cause for celebration, but most fans still feel a sense of disappointment. The humbling by Barcelona in the Champions League quarter-final was followed by defeat in the North London derby (the first time that Spurs had beaten Arsenal in the Premiership for over a decade) and the desperate collapse against a feeble Wigan side.
If it wasn’t evident before, it has become abundantly clear that Arsenal need to strengthen the side during this summer’s transfer window. We are not talking about a major rebuilding programme, but most supporters know where the priorities lie. First, no team is ever going to win the title with goalkeepers of the calibre of Manuel Almunia and Lukasz Fabianksi. There could also be significant changes to the central defence. The hapless Mikael Silvestre should be allowed to leave, while William Gallas’ contract is due to expire and at the age of 35 Sol Campbell cannot be a long-term solution, despite his sterling efforts since he returned. The squad would also benefit from another powerful defensive midfielder to cover for the much-improved Alex Song. After crashing out of the Champions League, even the loyal Arsene Wenger admitted that his side needed reinforcements, “We have to add something, for sure.”
"Good arguments for strengthening the squad"
The club has always maintained that it has the funds to compete in the transfer market and this was confirmed by chief executive Ivan Gazidis when commenting on the most recent accounts, “We have money available to invest in the transfer market when we can identify the right players to add into the mix that add something to the squad.” A couple of weeks ago, chairman Peter Hill-Wood gave an explicit green light for a spending spree this summer, “We have got more money than we’ve had for a long, long time and we would like to spend it. But we want to spend it sensibly. There is plenty of cash, although not in comparison to Manchester City.” His normally circumspect manager was just as bullish, “We can match Chelsea and Manchester United in any bid. They can’t buy all the top players.”
But exactly how big is the transfer budget? For obvious commercial reasons, the club has not divulged how much money it has, but you would expect a considerable surplus to be available from playing in a 60,000 sold-out stadium with some of the highest ticket prices in the world, especially when the club’s wages to turnover ratio is among the lowest around. The newspapers certainly appear to be completely confused. The Daily Telegraph announced this week that “Wenger gets £18m war chest”, though did not bother to explain how they arrived at this figure in the accompanying article. The Daily Star typically went big with “Arsene Wenger’s £60m spree”, while the Sunday Times was more oblique, “If Wenger wants to sign two £20m players on £80,000 per week this summer, he has the means to do so”. Even John Cross at the Mirror, normally so authoritative on all Arsenal matters, seems unsure, saying that “the club has £50m plus to spend” last October, only to reduce this to a “£30m plus budget” this month.
"Time to open the cheque book"
So, let’s take a look at the accounts to see if we can work it out, as the Beatles once said. The starting point is an impressive cash balance of £101m, but that includes £22m which must be maintained on deposit as security that future payments of interest and principal can be made to bond lenders, leaving £79m. Much of this will have come from season ticket money paid in advance, which will be needed to cover operating costs in the second half of the accounting year. As we do not know when expenses are incurred (or other income is received), we cannot say for sure how much cash is required for this. Your guess is as good as mine, so let’s just take the estimate of £35m from the esteemed Arsenal Supporters’ Trust, which would leave the club with net cash of £44m - still pretty good by most standards.
Half of this came from last summer’s profitable player trading. The annual report boasts “all proceeds from player sale transactions are made available to Arsene Wenger for re-investment back into the development of the team”. This is reinforced by the terms of the stadium financing deal, which states that 70% of all net sale proceeds must be used on buying players or placed into a ring-fenced Transfer Proceeds Account (TPA). This protects lenders by ensuring that the club continues to invest in its core asset, i.e. the playing squad. The sales of Emmanuel Adebayor (£25m) and Kolo Toure (£16m) to Manchester City less the purchase of Thomas Vermaelen (£10m) from Ajax produced a net surplus of £31m, so £22m went into the TPA.
"Pointing the way forward"
Importantly, this fund can also be used to improve players’ contracts and this has become key to Wenger’s approach to investing in the squad. Most fans probably do not appreciate that the manager controls a budget covering both transfers and wages, so just because money is available to him does not necessarily mean that he will use it to purchase new players. Instead, he can allocate cash to increase the wages of the existing squad, which is a route he has clearly followed. The interim accounts highlighted an £8.6m rise in player wages, despite the departure of Adebayor and Toure, who were on very high salaries. This reflected the re-signing of 17 first-team players on long-term contracts, which the chairman described as an “investment in a very talented group of players” and as the “best means of protecting the value of one of our most important assets”.
That may well be true, but it implies an annual wage bill of £120m, which is admittedly £30m less than Chelsea, but is now over 50% of turnover. Although that’s lower than most other clubs, you would not really want to push it any higher, even though there will be pressure to do so for a number of reasons. This month’s increase in the top income tax bracket from 40% to 50% has compounded the currency effect of Sterling’s weakness against the Euro, making England a less attractive proposition for foreign players, which can only be compensated by increasing gross salaries. At the very highest echelons, the market might also continue to be artificially inflated by the presence of extremely wealthy benefactors like Roman Abramovich and Sheikh Mansour, not to mention the Spanish giants Real Madrid and Barcelona.
Hence, the so-called “golden handcuffs” deal to keep Cesc Fabregas away from the Catalans’ clutches, which not only increased his salary from £80,000 to £110,000 a week, but actually back-dated it for two years, resulting in a “signing-on” fee of £3m. It is strongly rumoured that Wenger’s first addition to the squad this summer will be Moroccan forward Marouane Chamakh from Bordeaux. This is presented as a free transfer, but he will reportedly be on a five-year deal worth £50,000 a week, which is a £12.5m commitment. See how important wages are to the overall cost of buying a player? A straightforward point, but one that Harry Redknapp did not seem to grasp at “pay up” Pompey.
What might be worth considering is whether the allocation of the wage bill is the right one, as much of it is currently given to younger players, who earn more at Arsenal than other clubs. In one sense, this is a shrewd policy, as it protects the players’ value in terms of future transfer fees, but it does mean that there is less money available to improve the first team squad. If the balance were fine-tuned, this could facilitate the purchase of the players who would make the difference between challenging for and winning trophies.
From a purely financial perspective, it is difficult to criticise Arsenal’s transfer strategy, as player trading has proved to be a very profitable activity in recent years. In the four seasons since the club moved to the Emirates, their net transfer spend has been a negative £35m. As a comparison, the net spend at their North London rivals Tottenham was £78m, even after the big money sales of Dimitar Berbatov and Robbie Keane, which is an incredible £113m more. Of course, any sales this summer would increase Wenger’s transfer pot and there has been media speculation about some departures, such as Eduardo to Lyon for £8m and Tomas Rosicky back to the Bundesliga for a similar sum. However, one potential barrier to clearing out some of the dead wood is the relatively high wages paid to the likes of Almunia, Eboue, Diaby and Denilson. Which other clubs would be willing to match their salaries?
"All in the past?"
On the other side of the coin, the club has provided £9m for “probable” additional transfer fees payable to other clubs after existing players make a certain number of appearances. It is not clear exactly when these payments will be made, but the prudent approach would be to deduct this from the available cash. On top of that, there are another £11m contingent liabilities for similar performance-related clauses, though these payments are considered less likely.
The really good news in the last set of accounts came from the property side. Although there had been considerable uncertainty arising from the market downturn, Peter Hill-Wood confidently announced, “It is clear that the next couple of years will see our property activities deliver excess cash”, while Ivan Gazidis confirmed, “We will soon be delivering a profit back into the football side of the Group”.
At the time the interims were published, 524 of the 655 private apartments at Highbury Square had been sold and recent reports indicate that there is only a limited number still available. We do not know how much money they sold for, but we can estimate the value of the 131 remaining apartments as between a conservative £33m (using the on-line starting price of £250k) and £54m (based on the average price of sales to date of £414k), which would produce net proceeds of £20m to £41m after clearing the outstanding debt of £13m (at the time the accounts were published). It’s a bit rough and ready, but if we take the mid-point for our calculations, that would produce £30m, though we do not know when the money will be given to Wenger. As Hill-Wood said, “This is very good news, although I would not want to speculate on the exact quantum or timing of this.”
"Welcome to Highbury"
Furthermore, the club’s other three property assets (Queensland Road market housing, Hornsey Road and Holloway Road) are now free of debt following the sale of Queensland Road social housing, so any future sales here represent pure profit. I have no idea what that could be worth, but let’s say £15-20m. The reason that I have guessed those figures is that it would result in total once-off property gains of £45-50m, which is in line with the £45m estimate from the Arsenal Supporters’ Trust and the £50m “surplus from sales” expected by the Times. Everyone seems to think that this money will be produced “over the next two years”, so it is far from certain that it will be on tap in the next transfer window. While we are being cavalier, let’s assume that half of the Highbury Square money is available now, leaving Queensland Road as future music, which would give Arsene another £15m now.
Given that Arsenal made a £5m profit from the core football business in the last six months, having stripped out player trading and amortisation, we could potentially add this to the transfer budget, but let’s be conservative and leave that untouched, so it can be used to cover other costs.
After all that, how big is Arsenal’s transfer budget? Well, we start with £44m cash, having allocated £22m to the security deposit for lenders and deducted £35m for second-half running costs, and then should reserve £9m for probable additional transfer fees, leaving us with £35m net cash. To that, we could add the estimated £15m from property development, giving us a grand total (drum roll) of a nice, round £50m.
The most obvious potential for revenue growth is in the commercial area, where Arsenal’s income lags way behind their peers, according to the Deloittes Football Money League 2010. Arsenal’s commercial revenue of £48m is much lower than the other teams in the so-called “Big Four” (Manchester United £70m, Liverpool £68m and Chelsea £53m). Understandably, Arsenal tied themselves into long-term deals with Emirates (stadium naming rights until 2021, shirt sponsorship until 2014) in order to provide security for the stadium financing, but recent deals by other clubs highlight the size of the opportunity, which is probably worth another £20m a year.
Gazidis is well aware of this and has recently restructured and strengthened his commercial team to explore new partners and overseas markets in order to “unlock value” (in his terms), though the thorny issue of more lucrative pre-season tours to America or Asia is on the back-burner until the club has a clear strategy for these regions. Arsenal’s transfer activities are also relevant to this area, as a new star would generate more shirt sales à la Ronaldo, Messi, Torres and Rooney.
"Gazidis unlocking value"
Other revenue streams are relatively fixed, though we know that broadcasting income will rise by £7.5m a year following the new Premier League deal for overseas rights. It is also difficult to see how match day revenue could be increased, given that Arsenal’s ticket prices are already among the highest in Europe, and there are some slightly worrying signs that demand at the higher end is not as strong as it has been. This is important, as the 9,000 premium seats generate approximately 35% of match day revenue. This may well have resulted in pressure on the manager from the board to buy some established stars, in order to improve the team’s chances of success, thus reducing the risk of a drop in crowds.
How about a spot of cost cutting? There certainly seems to be scope for some judicious efficiencies, as the annual costs of £55m for “other operating charges”, i.e. excluding salaries and amortisation, is actually higher than the total costs at seven Premier League clubs. Unfortunately, the club does not provide much detail for these costs, but they must include items like stadium operating costs, travel and training. What we can see is that these costs represent 25% of football turnover, which seems on the high side to me.
Hang on a minute, don’t Arsenal have a huge amount of debt to pay off? Yes and no. The astonishing advances on property sales have enabled the club to reduce net debt by circa £160m in the last twelve months to around £175m with the property developments now being essentially debt-free. This represents gross debt of £275m less £100m cash with the remaining debt being for the Emirates stadium, via a mixture of fixed rate and floating rate bonds that are due for final repayment in 2031. Total annual cost to service these loans is £20m (£15m interest and £5m principal reductions). It’s not clear whether it would be possible for Arsenal to pay off this debt early in order to reduce the interest charges, but my guess is that they are in no hurry to do that, as Gazidis has argued that not all debt is bad, “The debt that we’re left with is what I would call ‘healthy debt’ – it’s long term, low rates, very affordable for the club, and it’s effectively a mortgage on our stadium, which generates revenue.”
You might therefore conclude that all the funds will be invested in the team, but Peter Hill-Wood struck a slightly contrary note (not for the first time), “In addition to investing in the team, I think we will examine investment in club projects and infrastructure … into the next phase of growth.” Not sure what that might mean, but it inspires visions of adding a new tier to the Emirates like the San Siro before the 1990 World Cup – though somehow I doubt it.
Those fans that would prefer to see the club put money into the “Arsenalisation” of the team rather than the stadium, would be comforted by Gazidis’ comments after the results, “We have delivered a profit before tax of £35m for the first half of the year, but it’s important to note that this isn’t our primary objective. The reason we run a responsible, profitable and self-sustaining business is so that we can deliver success to the club and invest in the club and ultimately deliver success on the pitch.” While Arsene Wenger believes he “would not be doing his job well if the club lost money”, he is at pains to emphasise that “the sporting side is always the most important thing.”
There is no doubt that the move to a new stadium has limited Arsenal’s transfer budget over the past few years, which Wenger finally admitted this week, “The construction of the Emirates Stadium meant that for many years we could not spend a lot of money. Our financial situation has greatly improved. We are finally able to buy the players we think we need”. This is a much more transparent response than the previous obfuscation, but there is still a suspicion that Wenger would prefer to build rather than buy, so much of the low spending was out of choice.
Every summer, Wenger has repeated the mantra: “We are not short of money. I am not scared to spend money. We have a squad that is good enough to compete. I will spend for a player that we need.” Even though he clearly has money this year, Wenger seemed to be preparing supporters for another summer of low spending, when he told the club’s magazine, “I feel we have made huge steps forward this year compared to last year”, while also pointing out the dangerous consequences for the club’s wage policy of buying a top star on top dollar. Last summer, he also showed his hand when discussing Real Madrid’s galactico policy, “In my opinion, to recruit more than three new players in a transfer window, as Real plan, is taking a technical risk.” Wenger may feel vindicated after the lack of success for the Spaniards (and indeed Manchester City) this year, but critics would point to the improvement shown in the Champions League by Bayern Munich and Lyon, who were among the biggest spenders last summer.
There are two other factors that might influence Arsenal’s transfer targets. First, injuries have been a major dynamic this season with key players being lost at different stages (Robin Van Persie, Cesc Fabregas and Alex Song in particular) and the squad suffering a barely credible seven fractures. If they all return hale and hearty, that will be like making several “new signings”. Second, the Premier League has introduced a new home-grown player rule, which means that all clubs must register a squad with a limit of 25 players of which eight must be aged 21 or under and qualify as home-grown. The consensus seems to be that Arsenal are well placed to satisfy these quotas, but it might influence the club’s manoeuvres in the transfer market.
"Mind over matter"
Whatever signings Arsenal make, we can expect them reasonably soon, if you believe Wenger’s comments to the club magazine, “I have definite transfer targets and have been talking to people, but I will not tell you who. I believe the earlier you settle your teams the better it is and the less anxiety you have.” While some might cynically note that this announcement neatly coincides with season ticket renewals, there is a precedent for this approach, as he signed Rosicky before his goal scoring feats for the Czech Republic in Germany (and before his price was artificially inflated). It should also be noted that Wenger is going to South Africa to cover the World Cup for French television.
One final factor is that Arsene Wenger’s own contract expires next summer. The chairman has reiterated his support for the enigmatic Frenchman, “We want him to stay for as long as he wants, and we hope that will be for a considerable time yet”. Wenger’s sense of moral decency would not allow him to go on a spending spree if he felt that he was likely to leave, as a new manager will usually want to bring in his own players. From this perspective, the arrival of several new players would be doubly pleasing to the majority of Arsenal fans.
However, a few supporters are getting restless at the lack of trophies and reluctance to spend big in the transfer market, because Wenger’s reign has been like the proverbial “game of two halves”, winning three Premier League titles and four FA Cups in his first nine years, followed by nothing in the last five years. He is an outstanding manager, probably the best that Arsenal has ever had, but he might need to modify his transfer policy to ensure that he goes out with a bang.