It has been a mixed start to the season for Arsenal, as
promising away performances at champions Manchester City and a rejuvenated
Liverpool have been balanced against a disappointing home defeat to Chelsea.
However, there is an air of quiet optimism among the fans that Arsène Wenger’s
new-look side will be able to mount a challenge once the new players have fully
gelled. It certainly feels better than last year when the Gunners were on the
wrong end of an 8-2 thrashing by Manchester United.
In fact, Arsenal recovered well after that disastrous start
to finish in a creditable third position, securing qualification for the
Champions League for a hugely impressive 15 seasons in a row. Even Wenger was
moved to describe this feat as a “miracle”, citing the thrilling 5-2 victory
over Spurs in the North London derby as the turning point. Nevertheless, it was
a close run thing, as Arsenal only made sure of qualifying with a last day
victory at West Brom.
The team’s inconsistent performances can be partly
attributed to the significant amount of turnover in the playing squad,
exacerbated by losing some of the club’s best performers each summer. Last year
Cesc Fàbregas returned to his spiritual home at Barcelona, while Samir Nasri moved
north to join Manchester City’s project. In the recent transfer window, it was
the turn of leading scorer Robin Van Persie to head towards Manchester, though
he opted for Old Trafford, while Alex Song joined the long list of Arsenal
players transferred to Barcelona.
"Mertesacker - the power of Per-suasion"
Good arguments can be put forward that each of these sales
may have made sense individually, e.g. RVP was in the last year of his
contract, while the offer for Song was too good to refuse given his tactical
indiscipline, but taken together they do give the impression that Arsenal have
become a selling club, not overly bothered if their best players leave.
At least Arsenal appeared to have more of a plan this
summer, recruiting international replacements before the departures, including
the highly talented creative midfielder Santi Cazorla from Malaga, the
experienced German forward Lukas Podolski from FC Köln and last season’s top
scorer in Ligue 1
Olivier Giroud from Montpellier. Furthermore, the return of Jack Wilshere and
Abou Diaby after lengthy absences through injury enabled the club to wheel out
the tried-and-tested “like a new signing” line.
However, many fans remain baffled that a club of Arsenal’s
immense financial resources did not aim higher in the transfer market, such as
buying a striker of the calibre of Napoli’s Edinson Cavani or Atlético Madrid’s
Radamel Falcao. Of course, either of these would have broken Arsenal’s transfer
record by some distance, but the money is clearly available to fund a purchase
of this magnitude.
"Cazorla - Spanish eyes"
To the outside world, it appears that Arsenal have paid
rather more attention to strengthening their balance sheet, as opposed to the
squad, an impression that was reinforced by last week’s announcement of a hefty
profit for the 2011/12 season, described by Peter Hill-Wood as “another healthy
set of full year results.”
As is the chairman’s style, that was a beautifully
understated description of a thumping great profit before tax of £36.6 million,
which was up from £14.8 million the previous year. This was split between £34.1
million from the football business (up from £2.2 million in 2010/11) and £2.5
million from property development (down from £12.6 million).
The massive £32 million increase in football profit was
mainly due to profit on player sales rising £59 million to an enormous £65
million, largely from Fàbregas and Nasri, though recurring revenue also rose
£10 million to £235 million with more than half of the growth coming from
commercial operations.
However, this was offset by substantial increases in staff
costs of £40 million: wages climbed 15% (£19 million) from £124 million to £143
million; player amortisation surged 70% (£15 million) to £37 million after last
summer’s acquisitions; and a £6 million impairment charge was booked to reduce
the value of players “deemed to be excluded from the Arsenal squad.”
Net interest charges continued to fall, down to £13.5
million from £14.2 million (£18.2 million in 2009/10).
As anticipated, there was a further slow-down in the
property business with turnover falling from £30.3 million to £7.7 million, as
the Highbury Square development is now almost entirely sold.
Chief executive Ivan Gazidis was at pains to emphasise the
club’s self-sustaining model, claiming that the club “can and will forge its
own path to success”, though he must be concerned about the continuing decline
in operating profits, which have fallen from a £31 million peak in 2008/09 for
the football business. In fact, excluding property development, the club
actually reported an operating loss of £18 million last season, compared to the
previous year’s £9 million operating profit. This £28 million turnaround was
due to operating expenses (£38 million) rising much faster than revenue (£10
million).
Nevertheless, the bottom line is that Arsenal once again
made another sizeable profit, even if it was largely on the back of player
sales. There is no doubt that the club’s record off the pitch has been superb,
especially in the unforgiving world of football, where large losses are
frequently the order of the day. In fact, the last time that Arsenal reported a
loss was a decade ago in 2002, amply demonstrating its self-financing ethos.
The last five years have been particularly impressive, at least financially,
with Arsenal accumulating staggering profits of £190 million, an average of £38
million a year.
Arsenal have consistently been one of the most profitable
clubs in the world, though they are not quite the only leading club to make
money. Both the Spanish giants have recently reported large profits for
2011/12: Barcelona £41 million (€49 million) and Real Madrid £27 million (€32
million). In addition, Bayern Munich have been profitable for 19 consecutive
years. Manchester United slipped to a £5 million loss (before tax) last season,
dragged down by £50 million of interest charges, though they made a £30 million
profit the previous year.
At the other end of the spectrum, clubs operating with a
benefactor model reported enormous losses. Manchester City’s £197 million loss
in 2010/11 was the largest ever recorded in England, while Juventus, Inter,
Chelsea and Milan all registered losses of around £70 million. As Gazidis put
it, “we see clubs struggling to keep pace with the financial demands of the
modern game.”
That said, the arrival of UEFA’s Financial Fair Play (FFP)
regulations, not to mention the economic difficulties of many of the clubs’
owners, has produced a clear change in behaviour. Milan and Inter have been
selling their experienced, more expensive players, while City were relatively
restrained in the transfer market (by their own exalted standards) this summer.
Even Chelsea’s spending has been on younger players with a future resale value.
So far, so good, but Arsenal’s profits have been very
reliant on player sales and (to a lesser extent) property development. In
2011/12, if we exclude the £2.5 million profit from property development and
the £65.5 million profit from player sales, the football club would actually
have made a sizeable loss of £31.3 million.
No other leading club has been so dependent on player sales
as part of its business model. In fact, over the last six years, selling the
club’s stars has been responsible for £178 million (or over 90%) of the £195
million total profit. That’s great business, but it makes it very difficult to
build a winning team, as Arsenal seem to be perpetually two pieces short of the
complete jigsaw.
There’s little sign of this slowing down either, as the
sales of Van Persie and Song were made after the 31 May accounting close, so
will be included in next year’s accounts, contributing another £37 million of
profit.
These “once-off” sales are all well and good, but they have
been disguising Arsenal’s increasing operational inefficiency. This can be seen
by the decline in cash profits, known as EBITDA (Earnings Before Interest,
Taxation, Depreciation and Amortisation), which has virtually halved from a
peak of £66 million in 2008/09 to £35 million last season. That’s still pretty
good for a football club, but, to place it into context, it is less than 40% of
the £92 million generated by Manchester United, who also forecast growth to
£107-110 million this season.
This may be a tiresome accounting term, but it is important,
as it represents the cash available for a club to spend – unless it sells
players or increases debt. Assuming no change in overall strategy, this means
that Arsenal will continue to sell players unless/until they grow revenue or
cut their wage bill.
As Gazidis explained, “The reason we talk about the
financial results at all is that it provides the platform for us to be
successful on the field.” Given this truism, let’s look at some of the
challenges facing Arsenal.
1. How will the club grow revenue?
Looking at the club’s revenue of £235 million, which is the
fifth highest in Europe, it is difficult to imagine that this could be an
issue, especially as it is only surpassed by Manchester United in England (£331
million in 2010/11, £320 million in 2011/12), while it is way ahead of clubs
like Liverpool £184 million, Tottenham £164 million and Manchester City £153
million.
However, there are three problems here: (a) the gap to the
top four clubs is vast; (b) Arsenal’s revenue has hardly grown at all in the
last few years; (c) other clubs have continued to grow their revenue.
Real Madrid and Barcelona generate around £200 million more
revenue than Arsenal. Even though this shortfall would come down if the current
exchange rate of 1.25 Euros to the Pound were used instead of the 1.11
prevailing when Deloitte produced their survey, the disparity would still be
around £150 million, which makes it difficult to compete.
Although revenue rose £10 million last season to £235
million, this is effectively the only revenue growth since 2009, when revenue
was £225 million. The largest increase in this three-year period came from
broadcasting, which rose £11 million from £73 million to £85 million in 2012,
as a result of centrally negotiated deals for the Premier League and UEFA (for
the Champions League), so Arsenal’s board cannot take a great deal of credit
for that.
Much was made of commercial revenue rising £5.6 million to
£52.5 million, but this is only £4.4 million higher than the £48.1 million
received in 2009. In other words, this crucial revenue stream has only grown by
a miserable 9% in three years. Even though Gazidis stated in an interview with
the club website that commercial partnerships were “well ahead of our five-year
plan”, I would suggest that to date there has is not exactly been a
scintillating return on investment in the expensive new commercial team.
"Giroud - handsome devil"
The most important revenue stream for Arsenal, match day
income, has actually fallen from £100 million to £95 million, despite ticket
prices being raised last season.
It is imperative that Arsenal manage to find ways to
profitably grow their revenue, as Gazidis acknowledged during the results
presentation, “Our activities to increase revenue are important. Increased
revenues allow us to be more competitive and to keep pace with the ever present
cost pressures in the game.” The club’s Chief Commercial Officer, Tom Fox,
re-iterated this, when he described his role as “to build and grow the multiple
revenue streams at the club in order to maximise the money available for the
board and the manager to spend on the squad.”
Arsenal’s real revenue problem is that while they have
struggled to increase their revenue, other leading clubs have continued to grow
their business. In the three years since 2009, Real Madrid and Barcelona both
grew revenue by around £90 million. Madrid have just announced record-breaking
£411 million (€514 million) revenue for 2011/12, while Barcelona are not far
behind with £381 million (€476 million).
For English clubs, United’s revenue fell back to £320
million in 2011/12 after their earlier Champions League exit, but still
represented growth of £42 million since 2009, while the 2012/13 revenue outlook
they provided to analysts was a mighty £350-360 million. The only leading club
whose growth was anywhere near as low as Arsenal’s was Chelsea, but their
2011/12 figures will be much higher, due to the Champions League victory and
new commercial deals.
Arsenal’s Achilles’ heel from a revenue perspective has been
commercial income, which is extremely low for a club of Arsenal’s stature. Even
after the 13% increase to £53 million in 2011/12, this still pales into
insignificance compared to the likes of Bayern Munich £161 million, Real Madrid
£156 million and Barcelona £141 million.
The story is no better in England, as Arsenal’s £53 million
is less than half of Manchester United’s £118 million. While Arsenal have
barely registered any commercial growth since 2009 (just £4 million), others
have steamed ahead, including Manchester City (£41 million growth) and
Liverpool (£17 million growth). The discrepancy will be even worse when those
two clubs publish their latest accounts, as the 2010/11 figures do not include
the increases for new sponsorship deals with Etihad and Warrior respectively.
Arsenal’s problems in this area can be highlighted by a
comparison with Manchester United, who admittedly are the commercial benchmark
for English clubs. Back in 2007, Arsenal’s commercial income of £42 million was
just £14 million lower than United’s £56 million, but since then Arsenal’s
revenue has only risen 26% to £53 million, while United’s has rocketed 110% to
£118 million, leading to an annual difference of £65 million. Mind the gap,
indeed.
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 how much money Arsenal leave on the table every season.
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 2013/14. Following step-ups the shirt
sponsorship deal is worth £5.5 million a season, which compares very
unfavourably to the amounts earned by the other leading clubs, who have all
improved their deals in recent seasons, so Liverpool, Manchester United and
(reportedly) Manchester City earn £20 million from Standard Chartered, Aon and
Etihad respectively.
In fact, no fewer than eight Premier League clubs now have a
more lucrative shirt sponsorship than Arsenal. As well as the usual suspects,
Arsenal’s deal is behind Sunderland’s barely credible £20 million deal with
Invest in Africa, Tottenham £12.5 million (Aurasma £10 million plus Investec
£2.5 million), Newcastle £10 million (Virgin Money) and Aston Villa £8 million
deal (Genting).
The news is no better with Arsenal’s kit supplier, where the
club signed a 7-year deal with Nike until 2011, which was then extended by
three years until 2013/14. This 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.
Gazidis talks a good match, “we continue to be successful in
attracting top brands to sign on as commercial partners”, but the reality is
that Arsenal have been outpaced in this area. Yes, they have indeed signed some
new sponsors, such as Carlsberg, Indesit, Betsson, Bharti Airtel and Malta
Guinness, while other like Citroen and Thomas Cook renewed for a higher sum,
but there has been little tangible revenue improvement. Furthermore, Manchester
United continue to attract more secondary sponsors than Arsenal, including
seven since 1 July 2012 alone.
Indeed, much of the commercial revenue growth was down to
the overseas tour to Malaysia and China, which is something of a double-edged
sword, as it may well have had a detrimental effect on the players’ pre-season
preparation.
"Jenkinson - corporal punishment"
More positively, Arsenal will have a fantastic opportunity
for what Gazidis calls “a significant uplift in revenue” when the main
sponsorship deals are up for renewal at the end of the 2013/14 season. If they
could match the £45 million currently received by United and Liverpool for main
shirt sponsor and kit supplier, that would imply a £32 million increase in
revenue.
Great stuff, but the trouble is that the bar is being
continually raised in sponsorship deals, so United have recently announced a
truly spectacular deal with Chevrolet. Not only will this rise to an
astonishing £45 million ($70 million) in 2014/15, but the sponsor will even pay
them £11 million in each of the previous two seasons – while Aon are still the
sponsors. Not only that, but United have also persuaded DHL to pay £10 million
a season to sponsor their training kit.
In other words, there is no guarantee that Arsenal’s new
sponsorship deals will ride over the hill like the seventh cavalry to save
them, especially if the brand is damaged by a failure to qualify for the
Champions League (though that has not prevented Liverpool from securing superb
deals). Gazidis has said that “in terms of the financial impact, it will be as
significant a step forward as the stadium was in 2005”, but his commercial team
will have to significantly up its game – or Tom Fox will be considered about as
effective “in the box” as Franny Jeffers.
Match day income of £95 million is the fourth highest in
Europe, only behind Real Madrid, Manchester United and Barcelona, but that
makes the club very reliant on the revenue generated in the stadium – “more so
than any other club”, as Gazidis stated. Wenger confirmed its importance, “We
are very lucky because we have good support and the income of our gates is very
high.” Indeed, the £3.3 million that Arsenal generate per match is more than
twice the amounts earned by Tottenham and Liverpool.
However, this revenue stream seems to have reached
saturation point, as Arsenal continue to register capacity crowds of 60,000 and
their ticket prices are among the highest in the world. In fact, match day
income was actually higher in 2008/09 at £100 million, largely due to the high
number of home games played (or old-fashioned success on the pitch).
Furthermore, revenue per match has also fallen from the peak of £3.5 million in
2009/10.
Indeed, after the deeply unpopular 6.5% ticket price rise in
2011/12, most prices were frozen for this season, though 7,000 Club Level
members were asked to pay an additional 2%. The media made great play of the
cheapest tickets for the match against Chelsea (an A category game) being an
obscene £62, though they have been less voluble about the 28% reduction in
prices for C category games from £35 to £25.50. In addition, Arsenal have
introduced a number of pricing initiatives, e.g. discounting lower-tier tickets
to £10 for the Capital One Cup game against Coventry City.
The other issue here is what would happen if Arsenal failed
to qualify for the Champions League, even if the inferior Europa League was on
offer, as the season ticket includes the first seven cup games from European
competition and the FA Cup. The club would surely have to issue credits,
potentially leading to a 10-20% reduction in revenue.
The majority of Arsenal’s television revenue comes from the
Premier League central distribution with the club receiving £56 million in
2011/12, unchanged from the previous season. Each club gets an equal share of
50% of the domestic rights (£13.8 million) and 100% of the overseas rights
(£18.8 million) with the only differences down to merit payments (25% of
domestic rights) and facility fees (25% of domestic rights), based on how many
times each club is broadcast live. This methodology is very equitable with
Arsenal only receiving £4.4 million less than champions Manchester City.
However, the signing of the £3 billion Premier League deal
for domestic rights for the 2014-16 three-year cycle, representing an increase
of 64%, will “provide clubs with a significant boost to their revenue” per
Gazidis. If we assume (conservatively) that overseas rights rise by 40%, that
would increase Arsenal’s share by around £30 million (using the same allocation
system).
Of course, other English clubs’ revenue would also rise,
though lower placed clubs would not receive as much in absolute terms, but this
would certainly help Arsenal’s ability to compete with overseas clubs,
especially Madrid and Barcelona, who benefit from massive individual deals.
The other major element included in TV revenue is the
distribution from the Champions League, which was worth around £24 million (€28
million) to Arsenal in 2011/12. The amount earned depends on a number of
factors: (a) performance – a club receives more prize money the further it
progresses; (b) the TV (market) pool allocation – half depends on the progress
in the competition, half depends on
the finishing position in the previous season’s Premier League; (c)
exchange rates – the 2011/12 figure was adversely affected by the Euro’s
weakness.
In this way, Chelsea earned more than twice as much last
season as Arsenal with €60 million after their triumph in Munich.
Interestingly, Manchester United (€35 million) also earned more than Arsenal,
despite being eliminated at the group stage, as their share of the market pool
was higher after winning the previous season’s Premier League, while Arsenal
finished fourth. Potentially, Arsenal could increase their revenue by €30
million if they managed to emulate Chelsea’s success, but, by the same token,
they could lose €30 million if they missed out on qualification to Europe’s
flagship tournament.
However large the differences are between the English clubs
that qualify for the Champions League, it is still much better than the Europa
League, where the highest amount earned by an English representative was the
€3.5 million that went to Stoke City. Financially, the Champions league is the
only game in town, especially now that the prize money for the 2012 to 2015
three-year cycle has increased by 22%.
2. Are expenses out of control?
Last season saw the first operating loss in many years after
expenses rose at a much faster rate than revenue. In particular, the wage bill
shot up 15% from £124 million to £143 million, despite the sale of Fàbregas and
Nasri, two of the highest earners. Part of the increase was presumably due to
rushing in the likes of Per Mertesacker, André Santos and Park-Chu Young last
summer without enough time for meaningful salary negotiations.
In addition, a once-off charge of £2.2 million was included
to top-up the pension provision, while Arsenal’s lack of trophies and
commercial growth did not prevent Gazidis’ package rising 24% to £2.15 million
(salary £1.366 million, bonus £675,000, pension £100,000).
The explosive wage growth is nothing new. In fact, since
2009 wages have gone up £39 million (38%), while revenue has only grown by £10
million (5%), leading to a significant worsening in the wages to turnover ratio
from 46% to 61%. This is by no means terrible (most Premier League teams have a
ratio above 70%, while Manchester City notched up 114% in 2010/11), but is of
concern, especially as Manchester United have managed to maintain their ratio
around 50%. Though not the only reason, this helps to explain why so little has
been spent in the transfer market.
The problem is that wages in football resemble a sporting
arms race, as other clubs continue to set the agenda, notably Manchester City,
who have increased their wage bill from £36 million to £174 million in just
four years. Arsenal’s wage bill of £143 million is now the fourth highest in
England, behind City, Chelsea £168 million (2011) and Manchester United £162
million (2012).
Arsenal’s performance in regularly finishing third or fourth
in the Premier League means they have slightly outperformed expectations based
on the wage bill, though Tottenham fans would note that they ran them very
close last season with £30 million less wages.
"Wenger - train of thought"
One issue at Arsenal is the equitable wage structure, which
means that the top salaries are not enough to attract the world’s best, while
fringe players like Sébastien Squillaci and Marouane Chamakh are handsomely
rewarded for sitting in the stands. Arsenal’s wage bill is sufficient to sign
world-class players, but that would mean reducing the salaries of lesser
lights. This has been tacitly admitted by Gazidis: “Can we compete at top
salary levels? Yes we can, but we have an ethos at the club - the way Arsène
expresses it is that it is not about individual players, it is what happens
between them.”
The difficulty is in getting the unwanted players off the
payroll at their high wages, hence loans for Nicklas Bendtner, Denilson and
Park when the club would have preferred to sell them. However, there are signs
that the club is now acting on this with numerous departures this summer and
the hard line over contract discussions with Theo Walcott. This is a tricky
balancing act for the board: if they extend contracts too early, they risk
paying over the odds in wages; if they wait until the last minute, they risk
losing the player for nothing on a Bosman.
The other expense impacted by investment in the squad,
player amortisation, has also risen significantly from £22 million to £37
million. For those unfamiliar with this concept, amortisation is simply the
annual cost of writing-down a player’s purchase price, e.g. Mikel Arteta was
signed for £10 million on a 4-year contract with the transfer reflected in the
accounts via amortisation, which is booked evenly over the life of his
contract, so £2.5 million a year.
Many of the players that have been sold were fully amortised,
so amortisation was reduced much by the departures, but it has increased
following investment in new players. To give this some perspective, it’s still
a lot less than Manchester City (£84 million), but significantly more than
previous years.
3. Where has all the money gone?
After so many years of large profits, it is difficult for
most supporters to understand where all the money has gone. Gazidis is adamant
that it has been spent on football, “We generate revenue and we reinvest all of
that revenue in football. We don't pay dividends, the money doesn't come out of
the club. All of the money we make is made available to our manager and he has
done an unbelievable job in managing that spend.”
That’s sort of true, but the reality is that very little has
been spent on bringing in new players with net player registrations of just £4
million in the last six years. Instead, the vast majority has been gone on the
new stadium, property and other infrastructure (e.g. enhancements to Club
Level, “Arsenalisation” projects, new medical centre) with more planned for
development at the Hale End youth academy.
Since 2007 Arsenal have generated a very healthy £376
million operating cash flow, but have spent £71 million on capital expenditure,
£110 million on loan interest and £64 million on net debt repayments, while the
cash balances have risen by £118 million. 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 two seasons (nearly £90 million), this has been more than
compensated by big money sales, so their net spend has still been negative. In
fact, since they moved to the Emirates stadium, they have made £49 million in
the transfer market, where they are the only leading English club to be a net
seller.
Of course, Manchester City and Chelsea have been the big
spenders in recent years, splashing out £444 million and £235 million
respectively since 2006/07. Little wonder that Peter Hill-Wood complained, “At
a certain level, we can’t compete.” That said, in the same period, Liverpool,
Manchester United and Tottenham have also all spent considerably more than
Arsenal.
Following the elimination of the property debt, the club has
managed to reduce its gross debt to £253 million (down £5 million from last
year), leaving just the long-term bonds that represent the “mortgage” on the
Emirates Stadium (£225 million) and the debentures held by supporters (£27
million). Once cash balances of £154 million are deducted, net debt is now only
£99 million, which is a significant reduction from the £318 million peak in
2008.
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.”
4. How much is available to spend?
This question is provoked by Arsenal’s incredibly high cash
balances of £154 million, which are significantly higher than any of their
competitors with Manchester United the closest with £71 million (down from £151
million in 2011). Of course, not all of this is available to spend for a couple
of reasons: (a) 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, but this money is used to pay annual expenses, including wages; (b)
as part of the bond agreements, Arsenal have to maintain a debt servicing
reserve, which was £34 million in 2012.
Nevertheless, there is clearly still a large amount of cash
available to spend, especially as the cash balance does not include £26 million
to come from the Queensland Road property development (though this is only
payable in instalments over the next two years) and more (£10 million?) from
the two remaining “smaller projects” on Hornsey Road and Holloway Road. It also
excludes any money from this summer’s transfer activity with the accounts
giving a positive net impact of £11 million.
Although this is probably the figure most fans want to know,
it is actually almost impossible to calculate what could be spent in the
transfer market for many reasons. For example, most transfers are funded by
stage payments, so all the money is not needed upfront. In addition, Arsenal
could easily take on some additional debt, given the strength of the balance
sheet. Nevertheless, I estimate that Arsenal could safely spend £50-60 million
from cash resources.
"Diaby - king of pain"
The other 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 would
be at least partially offset by the departure of an existing player, not least
because of the limitations imposed by the 25-man squad rule, as highlighted by
Wenger himself.
5. Will FFP come to Arsenal’s rescue?
It is no secret that 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”, while the results
press release was actually entitled, “Results confirm Arsenal strongly placed
to meet UEFA’s new financial rules.”
On top of that, there are discussions at the Premier League
to introduce similar rules domestically. However, although there are some signs
of clubs modifying their behaviour, Arsenal’s faith in the new system may not
work out as planned.
First, there is much leeway in the FFP rules, e.g. clubs are
allowed to absorb aggregate losses of €45 million (around £36 million),
initially over two years for the first monitoring period in 2013/14 and then
over three years, as long as they are willing to cover the deficit by making
equity contributions. In addition, certain costs such as depreciation on fixed
assets, stadium investment and youth development can be excluded from the
break-even calculation.
Furthermore, there is a sliding scale of sanctions for
offenders, so it is far from certain that clubs will be excluded from UEFA
competitions. This is without considering the threat of a legal challenge from
a leading club.
Second, it is evident that FFP will benefit those clubs that
have the highest revenue, as they will be able to spend more on their squad,
but, as we have seen, other clubs continue to power ahead, so Arsenal are
likely to always have a shortfall against some clubs.
"I am Vito Mannone!"
With the new commercial deals in 2014 plus more money from
better central TV deals for the Premier League and Champions League, Arsenal
should surpass £300 million revenue in two years, but Real Madrid and Barcelona
are already around £400 million, while Manchester United are projecting
£350-360 million next year.
That said, Arsenal’s revenue will place them in the revenue
elite (“the top five clubs in the world with separation from the rest”, said
Gazidis), so they will be very handily placed to benefit from FFP, though it is
unlikely to act as some kind of magic potion to solve all of their financial
issues.
In many ways, Arsenal’s self-sustaining approach has been
admirable, though it has often felt like the club has been overly cautious.
Gazidis speaks of avoiding “the many examples of clubs across Europe struggling
for their very survival after chasing the dream and spending beyond their
means”, but Arsenal are a long way from such an awful predicament. As we have
seen, Arsenal do face issues around lack of revenue growth and an ever
increasing wage bill, but they still have much more room to manoeuvre than
most.
"Vermaelen - Tommy, can you hear me?"
The price of Arsenal’s self-sustaining model has been to
regularly sell the club’s best players, while charging the highest ticket
prices in the country, so this is not quite the financial Utopia that has often
been portrayed in the media. For the fans, it must be particularly galling that
the club’s two majority shareholders, Stan Kroenke and Alisher Usmanov, are
both billionaires, but there is little sign of either making any investment
into the squad.
Arsenal’s financial results are undoubtedly impressive and
they have done well to consistently finish in the top four, but whether the
current strategy is enough to bridge the gap to the leaders and actually win an
important trophy is debatable.
The board wastes no opportunity in telling supporters how
ambitious the club is, e.g. last month Peter Hill-Wood argued, “We have a
pretty good chance of challenging for the Premiership. I don’t see why we
cannot win it this year”, but
whether the fans believe that this is credible is another matter,
especially when the club does not use all the resources at its disposal.
