Thursday, October 6, 2011

Arsenal's Finances - 21 Questions

Just a few months ago Arsenal were riding high, as they still had credible chances to win trophies in four competitions. However, a late defeat to unfancied Birmingham City in the Carling Cup final initiated an awful sequence of events. Elimination by Barcelona in the Champions League was maybe predictable, though hopes had been high after a scintillating victory in the first leg, but the collapse of form in the Premier League was less understandable.

The fans were not best pleased by the club’s decision to raise ticket prices by 6.5% after another disappointing end to a season, especially against the backdrop of a takeover by one of the world’s wealthiest individuals, Stan Kroenke. Their mood was not exactly improved when the club sold its best two players, Cesc Fàbregas and Samir Nasri, in the summer.

Although there were sound reasons for these departures (Fàbregas wanted to return to his home town team; Nasri was entering the final year of his contract), it still seemed to underline Arsenal’s diminishing status and reinforce the label of a selling club. As manager Arsène Wenger said a few weeks earlier, “Imagine the worst situation, that we lose Fàbregas and Nasri. You cannot convince people that you are ambitious after that.”

"Oh Mickey, you're so fine"

That was a bitter pill to swallow, but could have been sweetened by the arrival of world-class replacements. The rumour mill spoke of hefty bids for the likes of Eden Hazard, Yann M’Vila, Mario Götze, Juan Mata and Santi Cazorla, but the fans had to make do with the last minute arrival of lesser lights like Mikel Arteta, Yossi Benayoun, Per Mertesacker, André Santos and Park Chu-Young. All fine professionals, no doubt, but not really the players to take Arsenal to the next level. These purchases in the latter stages of the transfer window smacked of desperation, rather than any coherent strategy.

The early signs for the new Arsenal have not been promising, as the club has endured its worst start to a campaign for over 50 years. Although the club has done pretty well in the Champions League, drawing away to Borussia Dortmund and winning at home against Olympiacos, the performances have not displayed Arsenal’s customary assured passing style. In the Premier League, it has been even worse with four defeats in the first seven games, including a humiliating 8-2 thrashing by Manchester United, a scarcely believable 4-3 loss to Blackburn Rovers and, most painfully of all, a 2-1 reverse against Spurs in the North London derby.

Arsenal’s support has always found some comfort in their self-sustaining business model, as the performance off the pitch has been the envy of most other clubs. However, even here, matters appear to have taken a turn for the worse in the recently announced financial results for 2011 with revenue falling from £380 million to £256 million and profit before tax declining from £56 million to £15 million. Clearly, that’s still far from shabby, but if you consider the magnitude of Arsenal’s profits in the last three years (2008 - £37 million, 2009 - £46 million), it’s a fair old fall.

Of course, headline figures can be highly misleading, so, with apologies to 50 Cent, let’s take a closer look at the underlying factors behind the numbers with 21 questions.

1. Why did the profit fall by so much?

There are two segments in Arsenal’s business: property development’s profit before tax actually rose by £2 million from £11 million to £13 million, while football dramatically fell £43 million from £45 million to just £2 million. Interestingly, chief executive Ivan Gazidis’s report partly attributed lower profits to a “reduced level of exceptional gains… from our property business”, but, even though the revenue was much lower, the profit is definitely higher after the write-back of an £8 million impairment provision and a £4 million reduction in interest payable, as all property debt has been cleared.

The principal reason for the huge decrease in football profit is much lower profit on player sales, which fell from £38 million in 2010 (mainly the sales of Emmanuel Adebayor and Kolo Touré to Manchester City) to £6 million in 2011 (largely Eduardo to Shakhtar Donetsk). The big money sales of Fàbregas, Nasri, Gäel Clichy and Emmanuel Eboué were not included in the 2011 results, as they took place after the accounting close of 31 May.

However, operating profit has also fallen by £11 million from £20 million to £9 million, as revenue was essentially flat at £225 million, while the wage bill surged 12% from £111 million to £124 million. Although player amortisation was £3 million lower, due to the limited investment in new players, this was offset by £3 million of exceptional costs associated with the takeover of the club.

2. Is the football business still profitable?

Yes, but the latest profit of £2 million emphasises how reliant the business model has become on player sales. Excluding the £6 million profit from this activity in 2011 would result in a loss of £4 million, partly due to the annual interest payments of £14 million that the club has had to cover since the club moved to the Emirates stadium.

The graph above highlights how much lower the football profit would have been if Arsenal had not been so financially astute in the transfer market. For example, the thumping great £56 million profit last year included £11 million from property development and £38 million from player sales. Without these exceptional factors, the pure football profit was only £7 million.

It is true that Arsenal still generated a healthy cash operating profit of £46 million in 2011, albeit £11 million less than the previous year, but that excludes non cash flow expenses like player amortisation and depreciation, which have to be absorbed via asset payments.

3. So Arsenal’s profitability is no good?

Far from it. Chairman Peter Hill-Wood observed, “We have had a robust financial performance, reporting another profitable set of full year results” and that’s fair comment. In the highly demanding world of football, very few clubs actually make money, as can be seen by looking at last year’s results when only four teams in the Premier League were profitable: Arsenal way ahead of the rest at £56 million, Wolverhampton Wanderers £9 million, West Bromwich Albion £0.5 million and Birmingham City £0.1 million.

This is emphasised by the huge losses reported by Arsenal’s perennial challengers: Chelsea £70 million, Manchester United £80 million and new kids on the block Manchester City £121 million. In fairness to United, their loss include many exceptional expenses related to the restructuring of their loans and they have recently announced a £30 million profit before tax for 2011.

To underline the Gunners’ focus on financials, Arsenal’s 2011/12 profit should be sensational with the inclusion of this summer’s player sales.

"Robin Reliant"

4. Why did revenue fall so much?

Revenue dropped by £124 million from £380 million to £256 million, but football revenue actually slightly increased by £2 million from £223 million to £225 million, so the fall was entirely due to the expected slow-down in property development, which declined £126 million from £157 million to £30 million.

The Highbury Square business peaked last year with the sale of 362 apartments worth £134 million plus the disposal of the Queensland Road social housing element for £23 million. This year only 69 flats were sold, as the club “sought to achieve value rather than sell off the remaining flats at the fastest possible rate.”

"Unlucky, Theo"

5. So is the property business over?

Not quite, but it’s nearing the end. Only 16 of the original Highbury Square apartments remain to be sold, though 21 additional property units adjacent to that development will also be available from spring 2012.

Three months ago, the Queensland Road market residential element was sold to Barratt, though the revenue and costs associated with this development will only be recognised in the accounts when legal completion occurs. This is estimated to be in summer 2012, so would only be included in the 2012/13 results. No financial details of this sale have been released, but The News of the World estimated that it was worth £25 million to Arsenal.

Discussions are ongoing with Islington Council’s planning department relating to the two remaining property sites on Hornsey Road and Holloway Road.

Importantly, whatever the accounting treatment, these developments will generate a useful chunk of cash, which has been estimated at £40 million in total by the Arsenal Supporters’ Trust. When commenting on the most recent results, Ivan Gazidis specifically noted this factor, “Our property business is debt-free, so any new sales of property do accumulate cash, which is very positive for the future.”

6. What’s happened to the revenue growth?

There has been zero growth since 2009 in the football operation, where revenue has been at the same level for three years: 2009 £225 million, 2010 £223 million and 2011 £225 million.

The only revenue stream that has grown in this period is broadcasting as a result of centrally negotiated deals by the Premier League and UEFA (for the Champions League). Both of the other revenue categories have declined, most notably match day income from £100 million to £93 million. Although the much maligned commercial area rose £2 million last year to £46 million, this is incredibly still £2 million lower than the £48 million reported in 2009.

7. Are other clubs suffering from no revenue growth?

Back in 2005 Arsenal’s revenue of £115 million was the lowest of the traditional Big Four English clubs, £51 million behind Manchester United’s £166 million. The move to the Emirates stadium in 2006 helped drive Arsenal to second place in the English money league, a position they have held since then.

So far so good, but as we have seen, the wheels have come off in the last two years. Chelsea and Liverpool also experienced virtually no growth in 2010, though I would expect Chelsea’s revenue to increase following new sponsorship deals with Samsung and Adidas. Liverpool have also signed lucrative new deals with Standard Chartered and Warrior, though their figures will be hit by the failure to qualify for the Champions League.

The problem for Arsenal (and the other clubs) is that Manchester United’s revenue is still growing apace – from £286 million in 2010 to £331 million in 2011 on the back of significant commercial advances. Not only that, but the Spanish giants have also reported substantial gains in 2001: Real Madrid from £359 million to £417 million and Barcelona from £326 million to £392 million.

8. So is Arsenal’s revenue on the low side?

By no means. Last season Arsenal’s revenue was the fifth highest in Deloitte’s Money League, only behind Real Madrid, Barcelona, Manchester United and Bayern Munich, so they’re hardly on the poverty line.

The issue is that Arsenal are struggling to increase their revenue, while the others are powering ahead. This was explicitly acknowledged by Arsène Wenger, “Barca and Real Madrid have much more financial power than they had 14 years ago, because they have individualised their TV rights.”

That’s certainly true, but Arsenal have also fallen behind on commercial income, where they only stand 13th highest in Europe. Last season their revenue of £44 million in this category was dwarfed by Bayern Munich £142 million, Real Madrid £124 million, Barcelona £100 million and Manchester United £81 million.

Not only that, but the gap is getting wider. While Arsenal’s commercial revenue slightly increased to £46 million in 2011, other leading clubs have all reported substantial improvement. In particular, Manchester United became the first English club to top £100 million from this revenue stream. Their £103 million is now £57 million more than Arsenal. Put another way, that’s the equivalent of ten players on £100,000 a week. A similar level of sponsorship money would revolutionise Arsenal’s wage structure.

9. Why is commercial revenue so low?

Arsenal’s weakness in this area arises from the fact they had to tie themselves into long-term deals to provide security for the stadium financing, which arguably made sense at the time, but recent deals by other clubs have highlighted the lost opportunities. The Emirates deal was worth £90 million, covering 15 years of stadium naming rights (£42 million) running until 2020/21 and 8 years of shirt sponsorship (£48 million) until 2014. Similarly, the club signed a 7-year kit supplier deal with Nike for £55 million until 2012, but that has since been extended by 3 years until 2014.

So, following step-ups, the shirt sponsorship deal is reportedly worth £5.5 million a season, which compares highly unfavourably to the £20 million earned by Liverpool from Standard Chartered, Manchester United from Aon and (reportedly) Manchester City from Etihad. Even more galling is that Tottenham now earn £12.5 million a season from shirt sponsorship (Auresma £10 million plus Investec £2.5 million). It’s the same story on the continent with Barcelona’s first-ever shirt sponsorship deal with the Qatar Foundation worth £26 million.

The news is no better with Arsenal’s kit deal, which now delivers £8 million a season, compared to the £25 million deal recently announced by Liverpool with Warrior Sports and the £25.4 million paid to Manchester United by Nike.

It’s not overly dramatic to say that Arsenal leave at least £30 million a season on the table, because of these historical commercial deals, which would fund the purchase of one great player every season. One of the club’s biggest challenges is how to bridge this gap until 2014, when these deals are up for renewal.

10. What is the club doing about commercial revenue?

New owner Stan Kroenke has said that he “intends to use his experience to help Arsenal continue to grow its global brand”, pledging that they “will be able to do as well as Manchester United.” Quite frankly, that seems a long way off, as United continue to raise the bar, most spectacularly the amazing DHL deal to sponsor training kit for £10 million a season, which exceeds the value of all but four of the main shirt sponsorship deals in the Premier League.

Arsenal have restructured their executive team at great expense, recruiting Tom Fox from the NBA in August 2009 as Commercial Director to “drive long-term commercial success.” However, the proof of the pudding is in the eating and so far there has been a lot of talk about “jam tomorrow”, as opposed to tangible revenue growth.

To be fair, it’s relatively early days in the club’s five-year plan and there are some signs of progress. In particular, a few secondary sponsors have been signed up recently, including Carlsberg at around £3 million a year and Indesit in a “multi-million” deal. In addition, Citroen extended their deal for a higher sum, while there were new agreements with Thomas Cook, replacing Thompson Sport, and on-line gambling firm Betsson. However, Arsenal still have less than half the number of sponsors that partner with Manchester United.

Arsenal’s tour to Malaysia and China was their first long-distance pre-season tour in 12 years and should help grow the club’s global fan base in this valuable market, potentially boosted by the signing of South Korea captain Park Chu-Young. The Guardian reported that the tour would generate £15 million, which seems on the high side, but there’s little doubt that this was a positive financial move, although may not have been ideal in terms of fitness conditioning.

Other improvements are less visible, but may deliver in the future, such as refurbishing the club premium areas and, most intriguingly, signing a multimedia distribution agreement with MP & Silva.

11. What happens if the club fails to qualify for the Champions League?

Arsenal have managed to qualify for the Champions League a remarkable 14 years in succession, though this season the side had to demonstrated impressive resilience to get through a tricky qualifying tie against Udinese. In other words, they have become accustomed to a regular infusion of substantial funds from playing in Europe.

Last season Arsenal received €30 million (£26 million) for reaching the last 16 in the Champions League, which was €3 million less than the previous year, when they progressed a round further. Even if they did not make it out of the group, they would still receive around £25 million, but the prize for doing better is considerable, e.g. last year’s finalists Barcelona and Manchester United received £44 million and £46 million respectively.

Those are just the television distributions, but there are also be additional gate receipts and bonus clauses in various sponsorship deals, increasing the amount of money at stake. In total, we’re probably looking at a £35-45 million potential revenue reduction.

The Europa League's TV distribution is very low in comparison. Last season, the two English representatives, Manchester City and Liverpool, each earned just €6 million for reaching the last 16, while the highest pay-out was only €9 million. However, at least this tournament would still deliver significant gate receipts. As the season ticket includes seven cup games, the price of the ticket would surely have to come down without Europe, so qualification for the Europa League is still worthwhile from that perspective.

In the past, Gazidis has claimed that Arsenal budget so that the club could survive missing a year of Champions League football without selling players, but there’s no doubting the importance of qualification, not least in terms of attracting the right calibre of player to the club, though Liverpool have managed to secure the services of the likes of Luis Suarez, despite being absent from Europe’s flagship competition.

12. What are the implications of slipping down the Premier League?

Even though Arsenal dropped a place to fourth in 2010/11, the Premier League distribution increased £5 million to £56 million, almost entirely due to the substantial increase in overseas rights for the new three-year deal that commenced last season. Excluding overall contract changes, there’s actually not an enormous difference between finishing third and fourth, due to the equitable nature of the distribution methodology.

Each club gets an equal share of 50% of the domestic rights (£13.8 million) and 100% of the overseas rights (£17.9 million). However, facility fees (25% of domestic rights) depend on how many times each club is broadcast live, and this was worth £11.6 million. Finally, merit payments (25% of domestic rights) are worth £757,000 per place in the league table. For example, if Arsenal were to drop, say, four places to eighth that would equate to a £3 million decrease in revenue.

13. Could they have avoided raising ticket prices?

The short answer is, of course they could, as nobody put a gun against their head, especially given that Arsenal enjoy the third highest match day income in the world, only behind Manchester United and Real Madrid. This fell slightly in 2011 from £93.9 million to £93.1 million, even though there was one more home match, as the mix was not so favourable, due to two fewer games in the Champions League. Arsenal’s season ticket prices are already among the highest in the world, though comparisons are difficult, as they include seven cup games.

Arsène Wenger made the reasonable point that the 6.5% price rise was necessary in order “to increase our income to fight with the other clubs”, but there would have been other ways of making a similar sum. For example, a bit more success on the pitch would have generated additional funds, either via a higher Premier League place (second was there for the taking) or more victories in the Champions League (remember Shakhtar Donetsk and Braga away?). Or how about one of the board directors that coined it after the sale of their shares to Kroenke paying the £3 million takeover costs borne by the club?

As the old saying goes, where there’s a will, there’s a way. Unfortunately, the club’s stance was explained by Tom Fox in an interview with an American magazine. After seeing the 40,000 waiting list for season tickets, he said “As a US sports executive… you think, you’re not charging enough for tickets.” In the business world, price increases are often considered the path of least resistance, and football club owners are proving increasingly happy to adopt the same approach, as their “customers” have the fiercest brand loyalty around. After all, an Arsenal fan is hardly likely to switch his allegiance to Spurs.

14. Will the crowd levels hold up?

Arsenal’s average attendance of 60,000 is the second highest in England, only surpassed by Manchester United’s 75,000. In fact, it is the seventh best in Europe. All good, but this level of support should not be taken for granted. Not only is the team less successful, but the quality of football at the Emirates has faded, leading to a less attractive “product” (to use a marketing term). In addition, the effects of the economic crisis mean that some fans will simply be unable to afford to follow Arsenal, a fact acknowledged by Wenger, “The stadiums will be less quickly full and we have noticed that already.”

15. Is it true that Arsenal have spent much less than other clubs on transfers?

Absolutely true. In fact, Arsenal are the only leading club to make money from buying and selling players in the era of foreign ownership (starting from the arrival of Roman Abramovich at Chelsea). Since 2003/04, Arsenal have net proceeds of £21 million, while Chelsea and Manchester City have spent well over £400 million. In the same period, Liverpool, Tottenham and Manchester United have all spent around £100 million.

Billy Beane, one of the pioneers of the Moneyball approach to buying under-valued players, is a big fan of Wenger’s approach, “When I think of Wenger, I think of Warren Buffett. He runs his football club like he is going to own it for 100 years.” Stan Kroenke clearly shares his view, praising Wenger for “his ability to spend money and extract value.”

This is all well and good, but in a time when other leading clubs are generously funded by benefactor owners, some compromise might be in order. Indeed, Gazidis promised a busy summer and Arsenal splashed out £53 million on new players. Of course, they still ended up with net sales proceeds of £18 million, as players leaving brought in £71 million. If decent offers had come in for the likes of Nicklas Bendtner, Manuel Almunia, Sébastien Squillaci and Denilson, this sum may well have been even higher.

"Jackie Wilshere said"

16. How much is available to spend on transfers?

Before the summer transfer window, Ivan Gazidis said that Arsenal had a substantial transfer budget, “Financially, we're in a strong position. We have resources to spend. We're certainly not sitting there saying 'Let's hold back on our resources for some reason.' Why would we? The resources are there.” My own estimate was that the club had £35 million available excluding any surplus cash from property development. Everything else being equal, as we have seen, the summer’s activity should have produced another £18 million, which would theoretically mean a transfer budget of £53 million.

Some fans look at the club’s cash balances of £160 million, up from £128 million a year ago, and think that more money must be available, but the club has to maintain a debt service reserve for the stadium financing and also has to consider the seasonal nature of cash flows, e.g. money taken from season ticket renewals at the beginning of summer will be used to pay expenses over the next few months.

Nevertheless, it is clear that a sizeable war chest is still there, as Gazidis recently confirmed, “We deliberately kept some powder dry… There are funds available to invest in a significant way in January and next summer.” Whether the club does so is another matter, though any expenditure in January might pay for itself if it makes the difference between qualifying for the Champions League or not.

17. But what about the wages?

While Arsenal could almost certainly afford to pay transfer fees for new players, there remains the question of whether they could also afford to pay the wages. On the face of it, this should not be a problem, as Arsenal’s wage bill of £124 million is one of the highest in England. Although it is £29 million lower than Manchester United’s £153 million, that was inflated by performance-related bonus payments, so the real difference is much lower.

That said, Arsenal’s wage bill in 2010 of £111 million was overtaken by both Manchester City £133 million and Liverpool £114 million, plus it was considerably lower than Chelsea’s £173 million, though that should reduce following the departure of a number of senior players.

The pressure to compete is obvious by the deterioration in Arsenal’s wage to turnover ratio from 46% in 2009 to 55% in 2011. Although this is still one of the best in the Premier League, it is the logical result of flat revenue and 20% growth in wages (12% last season alone).

Given the magnitude of Arsenal’s wage bill, it seems strange that they do not pay top dollar to their star players, but this is due to a couple of factors. First of all, Arsenal have a very large squad with a vast number of “young professionals”, but more importantly they operate an equitable wage structure, which means that the best players are not particularly well remunerated (by modern standards), while fringe players like Abou Diaby, Thomas Rosicky and Marouane Chamakh are handsomely rewarded for their efforts. Not only does this reduce the money available to attract world class players, but it also makes it difficult to move on under-performers, hence loans for Bendtner and Denilson.

This approach needs a root and branch review, as it cannot be adjusted for an individual player or others will soon demand equivalent pay rises. This is a concern with some key players entering the final year of their contracts like Robin Van Persie, Thomas Vermaelen and Theo Walcott. Van Persie has already complained that Arsenal will not pay “enormous amounts of money”, hinting that this encourages a player’s decision to “go elsewhere.” This issue was tacitly confirmed by Wenger, “I cannot today say that if we go to the maximum we are sure to sign a player.”

18. Can the club pay off its debt?

Following the elimination of the property debt, the club has managed to reduce its gross debt to £258 million, leaving just the long-term bonds that represent the “mortgage” on the Emirates Stadium (£231 million) and the debentures held by supporters (£27 million). Once cash balances of £160 million are deducted, net debt is down to only £98 million, which is a significant reduction from the £136 million last year and the £318 million peak in 2008.

It’s not clear whether it would be possible for Arsenal to pay off the outstanding debt early in order to reduce the interest charges, but my guess is that they are in no hurry to do so, as Gazidis has previously 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 and very affordable for the club.” 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.”

"No doubting Thomas"

19. Will UEFA’s Financial Fair Play help Arsenal?

Many fans believe that the FFP regulations will benefit Arsenal, as they force clubs to live within their means if they wish to compete in Europe. The theory was that this would lead to the demise of the big spending, benefactor model, while encouraging those teams who adopted a self-sustaining approach. Clearly, Arsenal will have no problem complying with the new rules, but other leading clubs are maybe not so badly placed as once feared.

Real Madrid and Bayern Munich have been consistently profitable, thanks to their huge revenue, while Barcelona have also reported regular profits except when there is a change in club president. Even Manchester United now make profits despite their ample interest payments.

Clearly, FFP will be more of a challenge for clubs like Manchester City and Chelsea, who make huge losses, but UEFA have made it easier for such clubs to conform. First, UEFA’s break-even calculation is not exactly the same as a club’s statutory accounts, as it excludes certain expenses, including depreciation on tangible fixed assets and expenditure on youth development and community development activities.

"Most ox-cellent"

Second, wealthy owners will be allowed to absorb aggregate losses (so-called “acceptable deviations”) of €45 million (£39 million), initially over two years and then over a three-year monitoring period, as long as they are willing to cover the deficit by making equity contributions.

If that wasn’t enough, clubs will be allowed to exclude wages from players signed before June 2010, so long as they are reporting an improving trend in their accounts. Granted, that “loophole” only exists for the first two monitoring periods (2013/14 and 2014/15), but it will buy the clubs time to improve their finances.

Finally, there has to be a concern that accountants and lawyers will look to bend the rules. Wenger accused Manchester City of doing just this with their £400 million Etihad deal, “They give us the message that they can get around it by doing what they want. It means financial fair play will not come in.”

In short, FFP may not prove to be the cavalry coming over the hill that some imagined for Arsenal. If it is, then it will be a good few years before it bites.

"Rambo - first touch"

20. What are Stan Kroenke’s plans?

All indications point to Kroenke being an owner that prefers not to interfere with those running the club, which he confirmed in a recent interview with the Daily Telegraph, “The idea is to put good people in place and trust them to do their jobs.” In fact, he has said that Arsène Wenger can remain at Arsenal for as long as he likes. However, you would have to think that he would take steps to protect his investment if it looked like Arsenal were struggling financially.

Although he is unlikely to push for a massive spending spree (“There’s a risk of going backwards if you over-react and start throwing money around in an attempt to solve your problems”), he is not afraid to spend, e.g. his Denver teams are among the top spenders in the NBA and NHL, while the St Louis Rams have spent the maximum allowed under the NFL salary cap rules.

He is a long-term investor who has never sold a share in one of his sporting clubs, but if he did want an exit route at Arsenal, then Alisher Usmanov, who holds just over 29% of the club’s shares, would happily provide it. He has offered £14,000 a share, which is considerably higher than the £11,750 that Kroenke paid to take his stake to around 67%. That seems unlikely, given Kroenke’s excitement about the potential at Arsenal, not least the global opportunities offered by broadcasting the Premier League.

"Pole apart"

21. What could Arsenal do to improve their finances?

Bearing in mind Peter Hill-Wood’s assertion that “strong financial performance is not an end in itself, but creates the platform from which the club can build and sustain the on-field success which is always the main objective”, there are a few actions that Arsenal could take:

a. Renegotiate the main sponsorship deals. Although these are only due for renewal in 2014, there must be some mileage in trying to negotiate an increase now in return for guaranteed renewal. Obviously, Arsenal’s ability to maximise value would be stronger if the team is winning trophies.

b. Review the wages structure to make it easier to attract world-class stars.

c. Offload under-achieving players, even if they are sold cheaply or given away, in order to have some room to manoeuvre in the wage bill.

d. Buy quality in January. This could boost the team’s performance in the second half of the season, as happened with Liverpool last season, and ensure that the likes of Van Persie don’t jump ship.

e. Rebuild the famous scouting network. It seems like ages since they beat other clubs to the best talent worldwide.

"Don't look Bac in anger"

f. Kroenke could loan the club funds to fill the hole until the commercial machine starts buzzing. He might even pay off the outstanding debt to remove the interest burden.

g. Consider a rights issue. Although an expensive (and unlikely) option, this would also raise money and might even extend the fans’ ownership scheme.

h. Inject some new blood onto the board. Former director Lady Nina Bracewell-Smith suggested that the current directors should be replaced by a more “dynamic, pro-active, younger board”, while Usmanov accused the board of lacking ambition.

i. Review the training and medical practices. Arsenal’s lengthy injury list, including crucial players like jack Wilshere and Thomas Vermaelen, has severely damaged their prospects for a few seasons. There surely must be more to it than simple misfortune.

Obviously, it’s not all doom and gloom at Arsenal. They have a fabulous stadium, a renowned academy, a great manager and a few top quality players. However, it does feel as if the club is at a crossroads and the decisions they take over the next few months could be very important for Arsenal’s future, both on and off the pitch.


  1. Another great article. FFP may not be the savior for Arsenal.

    One thing though - I think that the wage exclusion for wages on contracts signed before 1/6/2010 only applies to the year ending in 2012 (and therefore affects the first 2 periods as you stated). Clubs cannot exclude these wages in the years ending 2013 and 2014. I don't think that is clear in the article above.

    "ii) It proves that the aggregate break-even deficit is only due to the annual
    break-even deficit of the reporting period ending in 2012 which in turn is
    due to contracts with players undertaken prior to 1 June 2010" Page 85 of UEFA Club Licensing/FFP document

    1. You said one thing but that's two. get to the back of the queue

  2. Brilliant read as always!

  3. 'There are two segments in Arsenal’s business: property development’s profit before tax actually rose from by £2 million from £11 million to £13 million'

    one too many 'from' in the sentence.

    great read as usual anyway!

  4. @Anonymous (11:23),

    Quite right. I've now corrected that typo. Thanks for alerting me.

  5. Fascinating read as always

  6. A very well constructed and informative posting.

    The annual "shortfall" in Commercial revenue - circa 40M - gives much hope for a restructured and competitive wage structure within the next 2 years.

    We are short of around that very figure in terms of our annual wage bill being right up there as being competitive enough to attract the very best players.

    I have no doubt the likes of Tom Fox and Ivan Gazidis are fully aware of the opportunity to close said commercial gap with the 2014 renewals.

    Although the present playing staff may not be the best we have had in the Wenger Years, once we get the likes of TV5 and Jack back in the starting line-up, aligned with a greater integration of the new players, and maybe a superstar like Hazard in January, I'm sure we would have the edge on Spurs and Pool for 4th.

    The club must surely be aware of the massive need for a world-class signing in January to give the entire Arsenal spectrum an oomph in the final lap push for 4th.

    Should be a good xmas to be a gooner with all the speculation!

  7. great article. gave me a clearer understanding of the financial workings of the Arsenal than any other source. wish some journos could be as thorough in their reporting or that the board themselves explain in detail whats going on so that us fans know what we working with and therefore manage our expectations. i hope this is accurate coz i'll be using you as a source next time i'm arguing with other teams' supporters about club finances.

  8. Brilliant analysis, highlighting how despite the arrival of big spenders like Man City etc., the majority of Arsenal's problems are self-inflicted. It's clear that with the current mismanagement of wages, poorly implemented sponsorship deals and failure to attract further commercial revenue, added to Wenger's decline as a manager and inability to get the best out of his players, the manager and board are doing the club no favours. Time for change methinks.

  9. I don't think it would be unreasonable to get a cash injection from Kroenke to bridge the gap between now and 2014.

    It would allow us to buy quality to preserve the status of the club (stay in the CL, keep our best players, keep attendances up) and therefore greatly increase our attractiveness to sponsors so we can negotiate better deals.

    The club insists it is financial self sustainable, but if we can't compete with the standards set by other clubs then our footballing performance will soon hamper this.

  10. Excellent as as always Swiss. I think its fair to say the debt situation is remarkable. if one excludes the debentures (which is fair as they will never come due and basically incur no interest), financial net debt is a little over 60m(albeit struck at a time of maximum cash balances). Incredible given the stadium build and, as you alluded to, once the summer sales and the Queensland road income comes through, this figure could be close to zero.

    Of course, failure to qualify for the champions league will have a horrible effect, both in immediate revenues lost and on the ability to lift future commercial income in line with our competition. It would be sods law, that after years of struggling through with the aim of getting to 2014, we end up falling at the final hurdle and are simply not able to command the amounts we anticipated nor attract the players needed to compete. Worst case we could face a perfect storm and end up as the best of the rest, i.e. ourselves, Villa, Everton and Spurs.

    One thing that still really frustrates me though, is the decision to develop Highbury. I appreciate you have previously been quite positive on this, but property revenues have been 315m since the project started generating 32.5m pretax. Of this profit 6m relates to Drayton Park. So Highbury has so far only generated 26.5m profit(assuming Queensland Road was basically flat) with perhaps another 5m to come if we are lucky. Surely we could have sold it for more than that in 2006! The Board must be kicking themselves no matter how they try to spin it.

  11. Swiss Rambler - is there anything to stop Usmanov 'donating' money to Arsenal's transfer pot? I know the club want to be self-sustaining, but if an owner can invest now for a return later, wouldn't that be better all round rather than waiting for the team to mature, FFP, commercial deals renewals etc etc?

  12. Great article but I'm not sure that any of the list of "could dos to improve the club's position" are likely. I don't see Arsene sanctioning changes in medical and scouting matters, as he hasn't expressed dissatisfaction with either and, if anything, has championed them. I don't see the board introducing new capital or making temporary individual loans, as it goes against the "self sustaining" ethos that they seem wed to (and which benefits them accordingly). The commercial shortfall is well known but we seem to have our hands tied till 2014 (although early renegotiation would be worth a try). But the really significant one is whether the club are likely to redraw the wage structure so that it is more meritocratic and less egalitarian. I think this is critical but the club have shown no signs of seeing this as a handicap in attracting top talent; I hope I'm wrong and that reality has dawned in the light of this summer's failure to land top replacements for Cesc and Nasri - Mata, M'Vila, Hazard, Gotze etc. If January is going to offer renewed hope as a result of a top capture, some change on this front is crucial.

  13. Absolutely brilliant to read! I always love your research and analysis. Excellent! Your blog is one of the best than all!

  14. Great read as ever Swiss. Kudos for it. May be you should send a copy to AFC for their perusal :)

    Just wanted to ask if the debt that we have raised, it must be providing some tax shield to us? There was no mention in the write up hence the question. If we do get tax benefits then it may not be a bad idea to keep the debt at sustainable levels.

  15. Excellent analyis as always! Just wanted to point out a small error that I noticed, Barca's revenue in 10/11 (excluding player sales) was £392.5 million (€451 million) not £381 million like it has been mentioned in the article, while Real Madrid's revenue (excluding player sales) was £417 million (€480 million) and not £425 million as mentioned in the article. This was the second time I've noticed this in your articles, so thought I'd mention it. Cheers.

  16. I have made a facebook fan page for you Swiss Rampler :-) With links to all your articles :-)

  17. The one thing that bothers me realy, is why they dont come out, and tell us, if they can expand the stadium or nott, and why, or if they have plans for doing that.

  18. I think your depiction of the commercial deals presents an unfair picture of what happened.

    Arsenal needed money upfront in order to secure financing for the stadium on reasonable terms. While they have 'lost' in that these longer-term commitments have left them stuck in what now are comparatively low-paying deals, they 'won' in that they now have manageable debt levels secured on very favourable terms.

    This was very much a strategic decision, and while in the short run they are behind the curve on commercial revenues, in the long run they will be much better off.

  19. @Anonymous (4:11),


    The difference for Real Madrid is purely down to the exchange rate used, which will always be a factor when it comes to comparing performances with continental European clubs. For example, the latest Deloitte Money League, based on 2009/10 results used a rate of 1.22 Euros to the Pound.

    However, I have to hold my hands up re Barca's revenue, as I mis-typed my adjustment for player sales. Thanks for alerting me to that.

    I'll correct that and update the exchange rate.

  20. For some reason, the terms "player amortization" and Arsenal really don't fit conceptually in my head, even if technically true.

    If anything, I would have loved for them to have hdld onto Fabregas and Nasri until they peaked, became veterans, started to get old, and depreciation makes more sense conceptually.

    But yeah, I think eventually the quality of the product on the field will fade where they don't get as much UCL money, as much advertising, etc.

  21. @swissrambler (5:03) Cheers mate.

    I Apologise for going off-topic, but I was wondering if you could write a piece analysing Barca's latest financial figures.

    If you're looking for detailed figures for last season, you can check this slideshare presentation (although in Spanish) from the general assembly this year.

    The revenue figure of €451.6 million (excluding player sales) is mentioned in the 8 & 9th slides where they compare the salaries to revenues for the past 5 seasons.

    The latter part of the presentation (from slide 17) is regarding the budget for next season, where they predict a revenue of €461 million which is based on the team winning the league, reaching QF's of Champions League and SF's of Copa del Rey, so you can expect revenue to be considerably higher if the team goes further into these competitions or wins it. Last season's budget predicted a revenue of €420 million based on the same parameters, but after the great success (plus €15 million from Qatar foundation) final revenue turned out to be €473 million.

    You can also check the annual report here (only Spanish and Catalan unfortunately)

  22. You are right to highlight the importance of player sales to the balance sheet. Arsenal's Board have sold to the highest bidder regardless of the strategic interests of the purchaser. The result is they have traded their market position to maintain their income by selling 4 first choice players to Manchester City-who have said thanks very much and effectively replaced Arsenal in the ECL.
    The simple fact is Arsenal have managed their property debt well only by sacrificing player investment and the long term effect is there for all to see-a great stadium but a seriously declining team-we a talking below mid table obscurity.
    Arsenal's playing decline will have a massive impact on its commercial potential, and its capacity to attract star players. The last 6 months have been damaging-and this will become terminal if they don't change course now. A world class player needs to be brought in January and at every transfer window for the next season at least.

  23. To suggest that The Swiss Ramble has got something wrong is generally as sensible as telling Revenue and Customs to go and look at themselves in a mirror.

    And so it is with enormous trepidation that I've put forward a counter argument to one tiny point of detail.

    I needed a little more space than one would expect to take up in a comment, so its on the Untold Arsenal blog.

    But I do hope my admiration for your work transcends the fact that I am suggesting in this article you have got it a little bit wrong.


  24. Great stuff, as always.

  25. very interesting post!

  26. Excellent analysis! So, what does it say about Gazidis and his team who were brought to boost the commercial income of the club. Is it only about the sponsorships? what about the income from retailing and other branding exercises? Do they have the same number of retail chains as much as ManU or others?

  27. As always, a fine read. Say what you like about Peter Hill-Poshbloke but this quote should be the mantra for every club: “strong financial performance is not an end in itself, but creates the platform from which the club can build and sustain the on-field success which is always the main objective”

  28. Your blogs blow my mind SR (in a good way!). The level of analysis and detail is awesome!

  29. Brilliant as always. Looking at the money side of the club we love looking much more interesting than the performance on the pitch. Hopefully soon we can have our cake and eat it !! Keep up your awesome analysis. Alles gute

  30. Thank you for this article. That's all I can say. You most definitely have made this blog into something special. You clearly know what you are doing, you've covered so many bases.Thanks!

  31. Great read as always how to blog like you sometime soon!

  32. Bit late to the party on this one, but Swiss Rambler, I'm surprised to hear you of all people repeating this tosh:

    "i. Review the training and medical practices. Arsenal’s lengthy injury list, including crucial players like jack Wilshere and Thomas Vermaelen, has severely damaged their prospects for a few seasons. There surely must be more to it than simple misfortune."

    Wenger's been pretty clear on this: aside from the domino-effect a heavy injury list can have, it is entirely explainable by bad luck/statistical clustering. You can't possibly argue that Eduardo's or Ramsey's (or van Persie's) injuries were caused by training methods, and once you take them out, Arsenal aren't that far from the average - so there's very little to explain in any case.

    Arsenal have undoubtedly been rather unlucky with injuries over the past few seasons, but not to an extent that one needs to look hard for explanations. With twenty teams in the Premier League, once-in-twenty-years runs of good/bad luck are expected to be annual occurrences to one club or another.

  33. Sometimes I don't know if you are with us or against us. Cus you seem to cut City some slack on the FFP case where as you turn the dagger against us.

    OK, the FFP is not our savior, but FFP will punish City in the end if they don't complete the transformation from a buying club to a self sustaining club where they develop own talent?

    Not to be a lecturing prick, cus economics is not my field, but I'm an artist and I solely work off of emotion and feelings. Football is about feeling and emotion. It's as about as rational as having a nice bouquet on your table, there is nothing rational about it! We are all in it for the feeling and emotion.

    Sure we can all say it's about economics, but just how would City get away with FFP and we won't? Cus it seems you are saying that City WILL get away with as long as they invest in future talent, isn't that what we have been doing without success? AND having the master of all managers to pull us through it?

    Why, how and who says it's gonna be so easy for City to balance their books, and survive a year or two without CL qualification?

    Being in love, loving a club, loving music or loving a band is about a relationship. You commit, you engage and you take part in the ethos and philosophy. City are 2 years old and we are 125 years old, in making and making in success. How can you just BUY that?

    We, people aren't stupid. It's like saying people should just top caring about the Beatles?

    You might have the economics on your side Swiss, but I do believe that the young boys of Europe still want to play and support Liverpool, Arsenal, Manchester United, AC Milan, Barcelona, Real Madrid and EVEN Bayern Münich as opposted to City.....

    Yes we struggle and we are not a streamlined "company", but do we need to be perfect to be able to win?

    What's the other solution or way for us to win besides getting better sponsorship deals?

    Can't we just LOAN money like the rest?

    Doesn't anyone agree that a force of Hazard, Götze, M'Villa and Cahill (after todays horrendous display from Mertesucker) would improve our squad drastically?

    Sure they might cost us 150m£ but wouldn't it be worth the investment?

    1. "City are 2 years old". I think your maths is wrong. The young boys of Manchester have been supporting the City since 1894.


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