AST Analysis of Arsenal Holdings PLC

Full Year Accounts for the financial year 1 June 2014 to 31 May 2015

The following report is a short analysis produced by Board members of the Arsenal Supporters’ Trust (AST) examining the financial performance of Arsenal Football Club for the financial year ending 31 May 2015. We are again publishing a simplified version of the club’s accounts in table format as feedback suggests that members appreciate this snapshot view. The figures are all drawn directly from the club’s public accounts, a copy of which can be viewed on Arsenal.com

Comparison with previous estimates

In our February review of the half-year figures, we gave an estimate that the club would report a profit before tax of £11m for the full financial year. The actual profit was £24m. The principal reason for this variance came from a £15m windfall payment from the developers of Queensland Road.

Stadium revenues (matchday)

This year Arsenal again generated a record-equalling figure of £100m from match-going fans. In 2014-15 Arsenal played 27 home games, hosted an Emirates Cup and staged a Brazil friendly; the previous season Arsenal played 29 home games, hosted an Emirates Cup, staged 1 concert and went on an Asian tour.

Whilst you would think the absence of extra A and B games last season would damage income, this was offset by the 3% price increase imposed for season 2014-15, which brought in close on £3m and kept match day revenues unchanged. The AST have repeatedly argued that with revenues from TV and commercial contracts expanding by close to £90m over the three years ending May 31, 2015, the need to impose further ticket price increases has diminished, and that the club has scope to reduce the cost of tickets – especially to benefit younger fans and Arsenal’s away fans.

Sadly, the Arsenal Board instead raised prices by 3% – not because they need the money (£193m in cash, even after allowing for debt reserve, shows they don’t) but because they can.

Ivan Gazidis has repeatedly defended their record on price rises by saying they have increased by less than the retail price index (RPI) since the move from Highbury. This may be true, but it’s a convenient cut off point as it ignores the fact that ticket price increases far outstripped inflation for the 15 years before that. Secondly, the vast bulk of Arsenal’s costs are related to player wages and transfer fees and the amount spent by the manager on them is discretionary and not subject to the forces that influence the RPI. Arsène Wenger’s spending on players to date has not even required the full use of the club’s annual income and cash reserves (which the Board repeatedly insist are at his disposal), so increases in ticket prices are in our opinion unnecessary, difficult to justify and inevitably further strain the club/supporter relationship.

Broadcast revenues

Broadcast revenues increased by £4m thanks to the club’s repeat success in the FA Cup and an improved third place finish in the Premier League. The new Premier League three-year deal, due to start in season 2016-17, is expected to add an eye-watering £50m pa to Arsenal’s income with no associated cost. Other Premier League clubs will benefit by similar amounts. Champions League income remains significant (approx €30m) and should increase this season from the new TV and sponsorship deals announced earlier in 2015 (by approx 50%) – although if Arsenal don’t get beyond the group stage any increase is likely to be minimal.

Commercial revenues

As expected thenew five-year shirt manufacturing arrangement with Puma led to an uplift of £19m in commercial income to £78m. Despite this increase, Arsenal’s commercial income is still only 50% of the figures reported by Manchester United, and United’s new kit deal with Adidas gives them a £100m pa spending advantage. Arsenal also lag behind the commercial revenue reported by Chelsea, Liverpool and Manchester City.

Arsenal’s recent domestic successes are yet to noticeably feed through to commercial sponsorship revenues and the gap between Arsenal and its competitors continues to grow. This has to be a real concern and one which seemingly showed itself in the relative activity levels of the biggest clubs and ourselves in the transfer market this summer.

Property and player loans

A surprise £15m bonus payment from the developer of Queensland Road took us by surprise. This came from strong sales at the site and represents a one-time bonus. The remaining property sites at Holloway Road and Hornsey Road are held in the balance sheet at £9m and are still to be sold (note that £9m is a balance sheet figure and the eventual income may be higher or lower). We estimate in excess of £75m to have been generated from the property assets, including from Highbury Square, since the stadium move commenced. We believe all this cash is available to the football side of the business although it is held within one of the club’s numerous property companies. We cannot identify if any of it has been spent as overall retained cash reserves are still over £100m.

Wages

The wage bill increased above our expectations to £192m, an increase of some £26m or 16%. A small part of this increase went on non-playing staff (for example the training team was expanded again by 20% to 95 people and has now grown almost 50% in two years) and on Administrative staff (whose numbers increased by 41 to 345) but the vast bulk went on player wages.

In summer 2014 there were considerable changes to the playing squad with large numbers of players sold, released at the end of their contracts, or sent on loan. Several players were signed with one, Sanchez, on top money and many contracts have been renegotiated over the past two seasons. Even so, the increase was a good £10m more than expected, primarily we believe because two years’ Champions League bonuses were incurred (for season 2015-16 following the third place finish in May, with the prior season’s bonus incurred on qualifying in August 2014, making two lots of payments in one financial year).

The club invested modestly in players in summer 2015, signing one big wage earner in Cech, but also sent Szczesny out on loan and sold Podolski, so only a modest increase is expected in overall wages this season, unless things change dramatically in January. The manager has on occasion still referred to wages as being a barrier to matching the signings of competitors. We cannot see this as a valid reason given the pending broadcast income rises for this and the following season, although the issue of differentials between individuals may on occasion still be a concern with some potential signings (or agents).

Non-wage football costs (“other costs”)

These costs cover running the team (travel, medical costs, etc) stadium running costs, insurances and retail costs of sale (stock and running costs of the Armoury, etc).For many years they had been remarkably constant (£57-62m pa), changing only marginally to reflect the number of games and events staged at the stadium. In the financial year to May 2014 they suddenly jumped unexpectedly to £70m and despite the explanation in the accounts about staging more games and the costs of looking after sponsors, the biggest single factor was a payment of £3m to a Stan Kroenke-controlled company for “strategic and advisory services”.

The year to May 2015 saw Non-wage football costs grow another £2m to £72m. There were savings from not touring and hosting fewer games, but some cost increase from the growth in shirt sales (ie the need to buy the stock before selling it to fans). However, even with increased retail stock costs, the total would have gone down if the £3m payment to KSE had not been repeated. Sadly the reason for this charge was once again not fully explained in the accounts. It was defended at the club’s last AGM by the Chairman who said it was his idea! We have to question whether Arsenal really need £3m of consultancy services from KSE every year. They have never needed this kind of service before and if they now do, in what areas and why is the Highbury House team so light? Was a tender issued for the work to ensure value for money was received? We see nothing to suggest these questions were addressed, which makes it appear the fee is an arbitrary way for Stan Kroenke to take money out of Arsenal.

Amortisation

Amortisation is the accounting cost of buying the team spread over the length of the relevant players’ contracts and includes items like agents’ fees, Premier League levies and contract extension fees as well as the actual transfer fee paid for a player. As a minimum, we would expect the club to spend the amount of the annual amortisation charge (£55m) on new players every season with extra sums spent to replace players who leave at significant gain over their ‘book’ value in the accounts. Over the past four transfer windows Arsenal have spent more than £250m on new players who are still with the squad and the amortisation charge has more than doubled as a consequence to over £55m pa as players sold at substantial profits (over £120m from the likes of Fabregas, Nasri, Van Persie and Vermaelen) have been replaced. The spending slowed down this summer as the manager chose to stick with the current squad rather than sell on, let go or pay off older players and invest at the higher amounts now commanded by the market for top talent. In effect over £40m remains uninvested from just one summer, with the previous cash reserves still brought forward.

Profit on player sales

Arsenal booked a profit of £48m in 2012 from selling Van Persie and Song and £7m in 2013 from Gervinho. In 2014 the trend of letting selected players leave continued with £29m made from selling Vermaelen, Djourou, and the option to buy back Vela.

The 2013 and 2014 summer transfer windows seemed to signal times had changed and Arsenal were now a buyer as well as a seller of mature talent, as one would expect from a top club. But in summer 2015 the only changes were in the goal keeping position and the sale of Podolski for a small fee. Whilst other top clubs continued to be ruthless in selling on top names and buying replacements, our manager clearly still has his own views on value and didn’t feel the need to compete with Man Utd or other top European clubs for the players they purchased, preferring instead his current options. Indeed, the Chief Executive has cited the retention of players bought over the past three seasons as a virtue of the current squad and sign of its strength and of the quality of their transfer processes.

Cash

Arsenal’s end of financial year (May 31) headline cash figure (£228m) is always bloated by up-front season ticket payments that are needed to pay some of the wages and bills for the rest of the summer (“working capital”), but there are also a number of other items that will use up the cash held at year end. These include:

·         An allocation of cash on the balance sheet (£35m) that the club can’t spend because it’s held to the order of its stadium bond holders (“debt reserve protections”).

·         A net amount left in the balance sheet reflecting money to be spent and received on players spread between debtors, creditors and provisions. A big chunk of this is on a long-term basis as it relates to the agents cut on player transfers and wages and renegotiated contracts, and to deferred instalments on players and performance-related fees the club thinks will become payable in the future (in all approx £45m). In the next year we estimate that some £40m net is due to go out.

·         One-off amounts that were unpaid at year end (mainly located in accruals in the creditors note to the accounts). The club has drawn attention to FA Cup final ticket revenues not being paid over at year end, players’ champions league bonuses for 2015-16 being accrued in this year’s results, the KSE consultancy fee and the unpaid corporation tax bill (£6m) as all being unusual factors that helped boost creditor balances at year end. It is hard to be precise with all these amounts but £15m is our best estimate of the amounts that will impact on free cash.

So to summarise, we set out below our view of Arsenal’s current cash position:

In our last report we estimated £80m as being available for summer 2015 and allowing for the £15m property windfall this is consistent with that estimate. In past reports we have made an allowance of £25m as the amount the club could sensibly hold as a contingency to cover a rainy day, or more specifically a season of not qualifying for the Champions League. However, given the extra TV revenues scheduled for season 2016-17 we do not think any contingencies are required for this season. Accordingly, we estimate around £88m remained spare at the end of this summer’s transfer window.

Our estimates of spare cash available for transfers have long been an irritation to the club, and of course they tell us they cannot explain exactly what is available without letting all shareholders and the world at large know – something they do not want to do.

This subject was raised at the last AGM, and Chief Executive Ivan Gazidis referred generally to “superficial analysis” but then failed to provide any explanations. He did raise an issue of the club having, at the time, £30m of longer term net payables on player purchases as a reason for keeping more cash back now (the corresponding amount this season is nearer £45m). Our reaction to this was one of surprise then and remains one of surprise now. To us, based on our own years of commercial experience running our own companies, it seems excessively prudent for the club to withhold cash for amounts due in two or three years’ time when they have future operating surpluses and guaranteed rising revenue streams to help pay for them. Indeed, every forthcoming season sees approximately £50m of cash generated for transfers on top of any reserves, and with an extra £50m pa to come in 2016-17 from the new TV deal it is not unreasonable to feel that Arsenal will have considerable resources in summer 2016.

Whilst we appreciate the commercial sensitivity surrounding spare cash for transfers, it’s inevitable fans want to understand what funds are available and we try and do this in as informed a way as possible, based on the official report and accounts. If over-optimistic – or even accurate – estimates really are an issue for Arsenal’s board, we encourage Arsenal to help all fans and shareholders understand exactly why so much money needs to be held in reserve, by explaining more fully in the company’s annual report and accounts what working capital will be required for the financial year. However, we imagine they would claim this is impossible due to the commercial sensitivity around transfer budgets.

We believe our analysis is correct and we note that another widely read and valued independent report on Arsenal’s finances by the blogger Swiss Ramble comes to the same conclusions. It seems odd that with such resources available further additions weren’t made to the squad in key positions during the summer. It remains to be seen whether this will prove as costly to Arsenal’s title ambitions this season as it already appears to have been to their Champions League aspirations.

Overall financial performance: what does it mean for Arsenal?

In 2013 Ivan Gazidis spoke about becoming like Bayern Munich and last year about matching Chelsea’s wage spend, but whilst the accounts demonstrate that Arsenal have even more resources available to compete – even if they aren’t all utilised – they are miles behind the commercial earning power of Bayern Munich and Manchester United.

For 2014-15, the Board’s emphasis in the accounts was more internal and self-congratulatory with just one reference in the Chief Executive’s statement to the wider competitive environment and specifically “to strategic questions and opportunities needing discussing in the coming months” following the new TV deal and the influx of cash and potential increased competitiveness that might bring to the Premier League as a whole.

Quite what these issues are hasn’t been elaborated on but it seems to us Arsenal are heading for a situation where annual surpluses are likely and cash balances will remainhigh. What happens to the cash and whether the club continues to keep ticket prices high will remain issues for tense debate between club and fans.