AST Analysis of Arsenal Holdings PLC Half Year Accounts

For the period 1 June 2013 to 30 November 2013

This short analysis has been produced by AST Board member Simon Hill.

Firstly, we set out a simplified overview of the Arsenal’s accounts in a table format. The figures are drawn directly from the club’s accounts, with the full year to 31 May 2014 figures being AST estimates.

Matchday revenues (gate receipts)

Arsenal’s matchday revenues for season 2013-14 are likely to be up £9m (10%) to £102m. The increase is largely due to there being three extra home games. These were additional cup games – two of which took us beyond the 26 tickets within the Season Ticket allowance, so Gold members (c.36k) were surcharged at category A and B. The Emirates Cup returned following a break in 2012 due to the Olympics. These will be the largest ever Matchday revenues secured by Arsenal in a single season.

Broadcast revenues

This is the first full year of the new domestic Premier League TV deal (Sky and BT) which has seen revenues increase by almost 50%. This boost contributed to overall broadcast values increasing by £12m to £52m in the first half of the year. We expect Arsenal’s full year broadcast income to increase by 35%, reaching £116m. It is likely that Arsenal will see a slight fall in CL revenues in 2014 due to finishing fourth in the PL last season (compared to third the season before) and other English teams doing better this year and having a greater share of the English “pool”.

Commercial revenues

As was noted last year, the new Emirates deal adds some £17m net to commercial income annually and other secondary sponsorships (eg Gatorade) have helped further increase revenues. A new shirt sponsorship arrangement with Puma commences on 1 June 2014 and will add some £20m net to commercial revenues compared to the Nike deal from next season. We believe some element of prepayment was received by Arsenal from Puma in this financial half year, and while this has no effect on income, it has helped boost cash balances (perhaps by £10m). We expect full financial year commercial income of £56m. This should rise to at least £76m in 2014-15.

Property and player loans

There were modest revenues from on loan players (most notably Joel Campbell) and only four Highbury Square properties remain to be sold which will then leave the club with the Holloway Road and Hornsey Road sites which will hopefully realise in excess of £10m once planning consents are obtained. A significant cash boost of £20m was generated from the settlement of property debtors in the half year to 30 November 2013, mainly relating to the sale of Queensland Road last year.

Wages

Despite the huge increases of recent years and summer culling of deadwood the wage bill is still likely to grow by £11m over the season to around £165m (an increase of 7.2%). This will come as a surprise to many but is explained by the following: the new deals for the ‘British Core of Five’ coming on stream in this financial year; the impact of Champions League qualification bonuses becoming payable in August once the play-off game was won; the return of Park and Bendtner to the squad from loans last season; the cost of adding a stellar signing like Ozil to the squad with Arsenal for the first time paying Galactico wages.

The club have explained that they see maintaining a wage bill at 65% of the club’s total turnover as sustainable and are clear that their aim is to increase wage spending to get closer to the £180m/£190m recently recorded by Man Utd and Chelsea. This reflects the close correlation that exists in modern football between wages paid and football success.

Non-wage Football costs and Amortisation

Non wage football costs cover team support, travel and medical costs, stadium running costs, insurances and retail costs of sale (running costs of The Armoury, etc). They are remarkably constant other than being slightly impacted by the number of games held (approx £200k per home match day) and Emirates Cup appearance fees. This year we expect to see a small increase on last season (by £2m to £64m) as the extra games and events plus inflationary pressures have an impact.

Amortisationis the cost of buying the team spread over the length of the relevant players’ contracts and includes costs like agent fees, Premier League levies and contract extension fees as well as the actual transfer fee paid for a player. The charge for the first half was slightly reduced at £19m due to the fact Ozil came late in the transfer window (half way through the six months) and in the full year we expect a charge nearer to £42m.

Profit on player sales

Arsenal booked a modest £6m gain from selling players in the summer (Gervinho and Mannone). Most of the clubs competing at the top of the game have traditionally not relied on player sales  for income although clubs have begun to resort to generating profits in this way to balance the books for either FFP reasons (Chelsea) or because of failure to qualify for the Champions League (Spurs). Arsenal are now a buyer of mature talent as well as a buyer of developing talent, as one would expect from a top club, and we expect profits from player sales to be much less significant than in the past when dissatisfied players forced exits.

‘Spare Cash’ / Resources available to strengthen the team

Arsenal reported a free cash balance at 30 November 2013 of £120m – with further cash of £23m held back to guarantee debt service requirements. This was a significant increase on cash reserves held last year (£123m total) and reflects the following:

• Firstly, Arsenal received settlement of the property sales at Queensland Road reported in last year’s accounts. This generated over £20m in cash and leaves in excess of £60m sitting in the club’s property development subsidiary which we believe is all available to the football part of the business

• Secondly, the new agreements with Emirates and Puma have generated more favourable cash flows, with advance payments boosting November cash balances

These are permanent benefits and although some allowance has to be made for paying the bills in the traditionally low cash receipt months of December to March, we believe that close to £100m of this amount can at present be judged as ‘available cash’.

We think that the cash available will grow in the second half of the financial year, which contains the bulk of TV and matchday revenues together with Platinum and Gold Season Ticket renewals, due in March, April and May. Whilst there is a net £16m still to pay on player purchases, we believe the additional revenue streams will see the available cash resources reach close on £140m in June 2014.

Spending all of that on transfers is unlikely though, as the club is no doubt holding some reserve for rainy days (the possibility of finishing fifth or lower) and also needs to also allow for agents fees and increases in salary costs arising from new signings and contract extensions for players like Rosicky, Ramsey and Mertesacker.

The AST therefore concludes that a figure in the region of £100m is a reasonable estimate of what is available to spend on transfers in summer 2014. This figure also allows for the wage bill to further increase by up to £20m pa for the new signings, implying a total wage bill of £180m-£185m in season 2014-15.