Friday, 24 September 2010

Arsenal’s 2009/10 results: overall business in excellent shape but industry headwinds persist

Arsenal Holdings plc today published preliminary results for the year to 31st May 2010 (full accounts will be available in due course). This is my initial take on the figures.

The business is in very good shape overall. The strategy of borrowing to finance the building of the Emirates and the redevelopment of Highbury into apartments has clearly paid off. Net debt has fallen to £135.6m (2.4x football EBITDA) compared to a peak of £318.1m two years ago. All the debt incurred to redevelop Highbury has now been repaid and the Emirates financing is on a fixed rate of 5.3% with a maturity of around 20 years. The Highbury Square development generated operating profits of £15.2m, almost double last year's £7.8m. Now the property business is debt free, it should provide a useful fillip to cash flow in the next two years after which all sales will be complete.

Football profits (before player sales) are down because of rising costs and flat turnover. Higher profits on player sales compared to the previous year means profit before tax is up.

On these figures Arsenal will comfortably meet the new UEFA Financial Fair Play rules, in fact in this area it is probably the best placed of all the major English clubs.

Football revenue

All general admission and "Club Tier" season tickets sold out for the current season. The stadium brings in almost £3.5m of revenue per home game which is almost as much as Old Trafford (£3.6m per home game in 2008/09) despite the latter having a capacity 26% higher. This impressive sales performance is only part of the story of course. The further a team progresses through competitions the more income is generated and matchday income actually fell 6% in 2009/10 due to fewer home games being played (there was no CL semi-final for example).

Reflecting the improved Champions League TV deal that began in 2009/10 (and despite being knocked out a round earlier than the previous season), broadcasting income rose 15% to £85m. Arsenal significantly underperform United on media income due to a smaller share of the important CL "market pool" (Arsenal received €16.4m to United's €28.8m last year). The division of the pool is determined by the relative performance of clubs from each country and finishing places in the domestic league. Next year (in common with every other PL club), the new overseas rights deal means PL media income will rise by an estimated 10%.

Commercial and retail turnover declined year-on-year with both areas seeing falls of c. 9%. The club blamed this on their "...sensitivity to the recessionary climate". Arsenal are miles behind United, Real, Bayern and Barca when it comes to commercial revenue and recruited a new Chief Commercial Officer a year ago to improve in this area.

Overall, the increase in media income was not sufficient to offset weak commercial sales and the impact of fewer home games to leave football turnover down marginally.

Football costs

On the cost side, Arsenal have a good reputation for controlling wage costs with the move to the Emirates transforming the club's wages/turnover ratio, but these figures show the significant pressures still evident across football. Total wage costs (for all staff not just players) rose 6.5% and the club warns that there is more to come because "the full cost of a number of the new and revised player contracts entered into in the last 18 months has not yet fully translated into the reported wage cost". The ratio of wages to (football) turnover increased to 49.7% from 46.2%, still very good compared to a number around 80% at Chelsea and over 100% at City. In words that should concern all football clubs and supporters, Arsenal say:

"...there continues to be very strong upward pressure on players' wage expectations."

Football profits and margins

The wage pressure and slightly weaker turnover meant that EBITDA (before the impact of player sales) fell 13.5% year-on-year (a decrease of 375bps in the margin to 25.7%). The player amortisation charge rose by a moderate 4.8% to leave football EBIT down 34% at £20.4m.

Thankfully for the club, the sales of Adebayor and Kolo Toure to the ever generous Manchester City generated a profit of £38.1m vs. £23.2m in the prior year. This allowed EBIT including player sales to actually rise 8.5% to £58.5m. Football interest costs (the Emirate bonds) were down 1.7% to leave football PBT up 12.1% at £45m.

What we should take from this

Arsenal is a very well run club. Debt is totally under control, the business is profitable and cash generation is strong. Industry pressures (and underperformance on the pitch) means,  however, that there is little growth in the business.

These results also tell us quite a lot about the current economics of English football.

For those clubs with large modern stadiums, matchday still remains the most important element of turnover but growth in this area is hard to come by and revenue is of course highly dependent on the number of home games played.

The current growth cycle from media is clearly illustrated in these figures with Arsenal showing an increase year-on-year despite a weaker performance on the pitch as the new CL deal kicks in. But media growth is not a one way street and at 37% of media income the importance of CL qualification is obvious. I remain sceptical about ongoing football rights inflation. The domestic PL rights for the next three years have declined in real terms compared to the last deal perhaps showing early signs of maturity. International growth has been phenomenal, but may also be nearing a peak with some broadcasters now paying more per capita for PL rights than Sky/ESPN in the UK!

Commercial and retail revenue is obviously under pressure from the recession and with the prognosis for the UK economy dull at best, this trend seems likely to continue. Arsenal are determined to catch up with the best in class performance of United and the major Spanish clubs.

Whilst revenue for Arsenal and for most large English clubs looks to be stagnating, cost pressures remain very pronounced. Many hope that limits on squad sizes and the new UEFA Financial Fair Play regulations will moderate transfer and salary inflation, but there is no evidence of that from these figures.

Along with other big English clubs, Arsenal rely quite heavily on profits and cash from player sales (excluding the sale of Ronaldo the top seven English clubs reported an average profit on player sales of £19m in the 2008/09 season). The sharp decline in transfer activity over the summer means this year this source of profits cannot be relied upon. Arsenal say:

"There has been very limited player sale activity during the summer transfer window. As a result, in contrast to each of the previous three years, we do not have a significant profit on disposal of player registrations on the books at this stage of the new financial year. Subject to any transfer activity in the January 2011 window this may impact the final level of profits to be reported for the financial year 2010/11."
The flipside to lower receipts from sales may in the longer run be lower amortisation charges for clubs, but in the shorter term the impact may well be negative.

These results show what a prudently financed, well managed football club should look like. The sharp decline in net debt (debt taken on only for the purposes of investment, not to finance an LBO) stands in stark contrast to position of Manchester United and Liverpool.

Finance does not of course win trophies, and it has been five years since Arsenal has won one (and that was totally undeserved), but in a difficult world Arsenal look financially well placed.



Andrew said...

Great article Anders.
Isn't it a bit early to say that UEFA Financial Fair Play regulation will not moderate salary inflation? Most contracts will have expired when that truly comes in to force, so I would expect all new contracts to start reflecting that new condition.
Maybe this is part of the reason UTD are leaving new contract negotiations until the last year of their expiry.

andersred said...


Thanks for your comment.

I think the UEFA regs could well have a moderating impact, if the lull in transfer activity continues it will depress wage inflation itself. I'm just saying that there isn't any evidence of it in these results. In fact the comments are more bearish on wage pressure than I expected....


Andrew said...

Fair point anders.

I have noticed that virtually all of the playing staff at Arsenal have been offered new long term contracts recently. Wenger also has signed one a few months ago. Unless Fabregas is sold before the end of this financial year I would expect to see a much bigger impact as the signings of Koscielny, Squilliaci and Chamkh have all happened since the year end. So I can't see anything else except pressure on the wage bill.
I also think that Arsenal are much closer to the sustainable limits of player wages therefore and don't expect them to fall, but rather for other European clubs to maybe come back towards them. I also think that there is probably less disparity between the top and lowest earners in the squad, which helps retain young talent but increases the risks of more established stars leaving.

Terence McGovern said...

A VERY well balanced article given your own club affiliation.

Yes these are bumper figures for Arsenal but are in the main boosted by their property wing which will not last forever. They have about 80 units left to sell albeit in a pure profit environment. They also have three other development sites to work on so there will be some profit there too although how much is anybodies guess and even Arsenal wont try to venture a figure. Not their style I suppose.

What any Arsenal fan will see is that their commercial revenue is relatively poor but it should be remembered that this is as a result of long-term front-ended sponsorship deals with Emirates and Nike which allowed them to build the Emirates stadium in the first place so that is just a reality they will have to live with until 2014 and 2017 respectively.

All that being said, Having £128 million in the bank is nothing to be sniffed at and even taking the amounts used for guarantees for their stadium financing and allotted towarsd future construction projects, there is still over £80 million free to play with. Not that they ever 'play' with such figures.

One imagines that Hicks and Gillette or indeed the Glazers would have that money out to bail themselves out in the states, in a heartbeat.

there is no doubt that Liverpool's fall is now assured starting with their on field results and positioning last year and accelerting with debt position this year. After all paying £2.5 million a week in default fines is a good player a month basically. Then there is the reported £60 million penaly due on Oct 6th if they have failed to pay again at which point RBS will simply take over the club. This may or may not result in a 9 point deduction depending on whose lawyers win but either way Liverpool is circling the drain as Leeds did before them.

Given that as things stand with their commercial property empire in the US not generating enough revenue to sustain itself, the Glaziers have only one source of income to feed off of.(and they have an unhealthy appetite)

I would imagine, that it chills the heart of any knowledeable Utd supporter to know that these financial vampires have their fangs sunk irretrievably deep into the clubs finances where they will suckle all the potential progess and inevitably success away as the interest payments rise and rise.

As the sun sets over Manchester, it rises over London be it blue or red.
I do find what they are doing VERY offensive from the perspective of a fan. However as a fan from a competeing club that has had for years to compete from an uneven finacial footing, words cannot describe how much I am enjoying the net result and its inevitable exponential acceleration.

Anonymous said...

No little about your football but some great figures in those results for arsenal,is it true that Chelsea has a larger debt than manchester

Anonymous said...

Great post, and an interesting contrast to Juve:

Julian said...

One of the big issues about the Glazer situation is that how will they be able to sustain their financial model if the team goes into decline and there are no trophies - at least no major ones. Perhaps Arsenal are their role models whereby the financial situation has been improved despite a prolonged barren period. Keeping costs under control is the key and player wages is the biggest cost. Clearly United are not keen to sign players who will push that item up.

Anonymous said...

Maybe that is the Glazers plan But with Manchester being Hugely Successfull over the years of Glazer ownership then i dont see a major change in policy coming anytime soon

blindside said...

Interesting article. My question is about the owners at Arsenal. Even though the building of a new stadium is taking on debt. When the "Mortgage" is paid off, do Arsenal fans think that there will suddenly be loads of money to invest in the team.
As an outsider I think there would be nothing to stop the owners taking large amounts of profit from the club or selling it to another owner who would borrow money to buy it.
Arsenal fans maybe sold down the river on this one.
Again it comes down to lack of regulation.
Anders, I would be interested to hear your opinion on this.
Keep up the good work.

Anonymous said...

The Problem with Arsenal David is that there are many individual Shareholders.You have one Yank,a Russian(i think) and then a number of the Arsenal Board and with a minority of smaller shareholders.So you could not say they have one Owner, they are much like Manchester Utd before the Glazer Takeover

Darren said...

I think it's almost inevitable that Kroenke and/or Usmanov will make a move sooner rather than later. The danger for Arsenal of course is that either of them taking control would almost certainly involve leverage. I think 90% of Arsenals shares are held by four individuals? Kroenke, Usmanvov, Fizman & Bracewell-Smith? It's a dangerous situation, not too disimilar to when we at United had the Cubic v Glazer situation. Whether Arsenal fans can buy enough of a shareholding through their 'fanshare' scheme before Kroenke or Usmanov make their move is debateable.

Anonymous said...

Balanced pluarlity of ownership seems to be the model that benefits the club and its the supporters for the long term the most. But maintianing this is difficult when the share price rises (in Arsenal's case) from £700 in 1995 to £10,000 today.
Lady Bracewell-Smith for example, is looking at a shareholding that she inherited increasing in value from £7 million to £100 million in just 15 years. Anyone would tell you thats an investement worth cashing in on.
With 4 very strong share holders, it seems unlikely that a highly leveraged offer would be considered.

Enough of other clubs, how do United reverse the status quo and go back to a sustainable business model?

finneh said...

The one thing I would say about Arsenal, which you seemed to touch on is that their wage bill is likely to grow exponentially in the next 3-4 years, despite the new regs etc coming into force. This is due to their squad all being quite young and modestly paid in comparison to other teams.

The likes of Clichy, Denilson, Vela, Song, Diaby, Fabregas (if he stays), Nasri, Sagna, Wilshire, Ramsey... Will all be looking for bumper pay packages in the near future (probably next 1-3 years). Growing revenue at the same rate is likely to be a mammoth task.

UTID said...

Results are out Friday.
Will be interesting to see what David Gill meant when he said they were "excellent, generating cash" when you consider that negative cash flow was over 54m at Q3.
I anticipate a considerable amount of spin here.

John said...

Well i think we are all looking forward to seeing what steps if any the Glazer Family have taken to bring the Finance situ under control.

Enterprise Feedback Management said...

On these figures Arsenal will comfortably meet the new UEFA Financial Fair Play rules, in fact in this area it is probably the best placed of all the major English clubs.

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