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.