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AST Analysis of Arsenal Holdings PLC Full Year Accounts for the financial year 1 June 2012 to 31 May

Posted Tuesday 22nd October 2013

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 2013.

We are publishing a simplified version of the club's accounts in a table format as feedback suggests that members appreciate a snapshot view. The figures in the table are all drawn directly from the club's public accounts, a summary of which can be viewed on Arsenal.com

In the analysis that follows we explain some of the key factors behind these figures.

Comparison with previous estimates; One-off contract cancellations & sale bonuses

In our review of the half-year figures, the AST gave an estimate that the club would report a profit before tax of £11m for the full financial year. The actual profit was £7m. The principal reason for this variance came from one-off provisions Arsenal made at the year end to cancel the contracts of certain players no longer deemed good enough to contribute to the first team squad. The total cost of cancelling these contracts was £10m. There was also some extra profit earned from player sales of about £4m, which we believe is likely to be from bonuses arising from the sale of Cesc Fabregas and Van Persie (bonuses due to his contribution to Manchester United winning the League).

Stadium revenues (matchday)

In season 2011-12 Arsenal played 29 home games, staged an Emirates Cup, but no concerts were held.  

In 2012-13 Arsenal played 26 home games, there was no Emirates Cup (due to the Olympics) but 5 concerts and an Asian tour (July 2012) took place.

The fewer home games played necessitated the refund of a "B" game to season ticket holders, which was the main reason for the £2m fall in gate receipts.

The AST hope that with revenues from TV and commercial contracts expanding (and the surplus cash Arsenal hold), the need to consider further general admission ticket price increases will diminish and that the club will see further scope to reduce the cost of tickets. This would build on the welcome initiatives introduced following AST & supporter group campaigns to benefit younger fans and Arsenal's away fans.

Broadcast revenues

Broadcast revenues remained almost static, registering an increase of just £1m as a result of Arsenal staging extra televised games. Our Champions League payments were less than would have been expected due to the standard pool payment of 20% Arsenal were due to receive being reduced to 15% as a result of Chelsea having won the previous season's Champions League.

Premier League broadcast revenues (for domestic and overseas rights) are expected to increase by approximately 50 per cent (£29m) in 2013/14 - a significant boost to income, which will substantially reduce Arsenal's core losses on trading before player sales.

Commercial revenues

As highlighted in our review of the half-year figures, Arsenal reported a significant jump in commercial income in the second half of the financial year due to the new Emirates sponsorship agreement. We estimate £8m of the £10m increase over the year to be from Emirates.  Arsenal are spreading the revenue from this renewal over a six and half year period and next year's commercial income will show a further increase from a full year of earnings from this new arrangement.

A new shirt manufacturing arrangement is also under negotiation for 2014-15 and an uplift of at least £15m pa should be achievable on the current £11m pa provided by Nike.

Despite this increase, Arsenal's commercial and retail income is still only 40% of the £153m reported by Manchester United. Securing further growth in commercial income from new secondary sponsorships is now the most vital component of future revenue growth, so that the overall size of the wage bill can increase and remain competitive with Europe's leading clubs.

Property and player loans

As explained in our review of the half-year figures, various 'in-fill' properties around the old Highbury ground were sold, as was the Queensland Road site on deferred payment terms.

There remain seven infill properties to be sold and the club will then be left with the Holloway Road and Hornsey Road sites. There is still substantial spare cash to be generated from property assets held in the balance sheet over the next two years (£20m in debtors in 2013-14 and £13m in stock over the next two to three years). In all, we estimate in excess of £60m to have been generated from the property assets, including from Highbury Square, and we believe all this cash is available to the football side of the business.

Wages

The wage bill increased in line with our expectations to £154m, although the extra £4m in provisions for, in effect, payments to some of the players who left in the summer was a surprise. The wage bill, allowing for exceptional items, at the end of May was some £150m and the full year effect of rises agreed in the year for the "British 6" still has to be factored in.

However, since the financial year end there have been considerable changes to the playing squad with large numbers of players sold, released at the end of their contracts, or paid to terminate their contracts early. In contrast, relatively few players joined the squad and we believe there will therefore be a small increase in the total wage bill for 2013-14.

In our last commentary we expressed continued concern at the club's policy of paying players in a narrower egalitarian spread (the socialist model) than the pyramid style most leading football clubs adopt, and the difficulty this causes when players deemed surplus to requirements have no desire to leave.

Ivan Gazidis has on more than one occasion responded to our questions on this issue by agreeing that a change in approach to the current wage structure is required and the signing of Mesut Ozil, a player who we anticipate could earn close to £12m a year at Arsenal when image rights and bonuses are allowed for, is a striking demonstration of this.

Non-wage football costs

These costs cover running the team, travel and medical costs, stadium running costs, insurances and retail costs of sale (stock and running costs of the Armoury, etc). They had been remarkably constant in recent years, changing only marginally to reflect the number of games and events staged at the stadium. This year additional touring costs, surplus property provisions of £1.7m and losses on the Euro contributed to a larger than expected increase in these costs to £62m. Little reduction is expected in future years as more and more cost is expended to secure extra commercial and event-hosting incomes.

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 on new players every season with extra sums spent to replace players who left at significant gain over their 'book' value in the accounts. Over the past two seasons Arsenal have spent close on £120m on new players who are still with the squad and the amortisation charge has more than doubled as a consequence to over £40m pa as players sold at a substantial profit (over £100m) have been in part replaced.

In addition to the annual amortisation charge, in each of the past two seasons Arsenal have made provisions of £5m and £6m respectively against players who are no longer part of the squad but who were still carried at a positive value in the books (eg Park, Santos and Chamakh). This should represent a non-recurring cost.

Profit on player sales

Following on from £66m of gains from selling Fabregas, Nasri, Clichy, etc, in summer 2011, Arsenal booked a profit of £48m in 2012 from selling Van Persie and Song. Most of the clubs competing at the top of the game do not rely on selling their best players to balance the books. If they are a talent developer then they will, and we witness clubs like Spurs and Everton relying on gains from sales to balance the books. Arsenal's gains have increasingly come from player dissatisfaction forcing the club to allow developing players to leave before their sell-by date.

Times are changing and Arsenal are now a buyer of mature talent as well as a buyer of developing talent, as one would expect from a top club, but we believe this change in strategy has not  been taken fully on board by media and commentators alike.

Cash

Arsenal's end of year (May 31) headline cash figure (£153m) is always bloated by upfront season ticket cash payments that are used to pay the wages and bills for the rest of the season. There is also an allocation of cash on the balance sheet that the club can't spend because it's held to the order of its bond holders (debt protections). At the May 31 year-end this 'unavailable' cash is estimated to account for close to £80m leaving some £70m "spare", of which approximately £30m net was invested in the squad during the summer.

In addition to this surplus, further property monies are due to be received in 2013-14 (£20m) and a cash surplus will be generated at the end of the current season from season ticket renewals for summer 2014 (£30m). These extra amounts will be available to meet instalments on players acquired in January 2014 or the summer 2014 transfer window.

Taking these factors into account, the AST estimates that the spare cash available for investment in the squad in January 2014 is approximately £50m. Further additional investment will be possible in the summer of 2014 as long as Arsenal qualify for the Champions League.

Ability to further invest in the team

The new UEFA and Premier League Financial Fair Play regulations (see note at end of the report) do theoretically impact on Arsenal's ability to add wages and amortisation charges to its profit and loss.

If one allows a 1:1 ratio between transfer fees and the contract value of the acquired player, that would mean £50m of investment in January 2014 on five year deals adding £20m to costs in the profit and loss account for a full year.

Whilst from a prospective trading position for 2013-14 this would not pose problems it could potentially in 2014-15 and beyond if the club lost, for example, its Champions League status and the broadcast income associated with it (some £25m pa).

So if the club added say £50m of investment in January but missed out on the Champions League places come May 2014, then it would be difficult under PL wage cap rules to add much further investment at the wage level in summer 2014, beyond the wages freed up by the expiry of existing deals for Bendtner and Park (possibly some £5m pa).

However, if the club does qualify, the new shirt deal should fuel further capacity to grow the wage bill still further, toward the £180m mark.

Arsenal will, in our opinion, manage any risk very conservatively so we expect them to invest cautiously window by window. That said, we repeat that we do believe they have the capacity to invest a further £50m in January if the right players can be found.

Overall financial performance: what does it mean for Arsenal?

Arsenal's income has been fairly static for a long time but that will now start to change as the new Premier League broadcast, Emirates and kit sponsorship deals kick in. In the meantime, Arsenal's wage bill continued to rise resulting in the club running at an operating loss before gains from player sales as the club sought to use the property cash raised from the redevelopment of Highbury to tide them over until the new deals were available.

The problems with this approach were two-fold. Firstly, a number of Arsenal's better players forced exits, adding unplanned profits and cash from their sales to the property cash being generated. A failure to reinvest the proceeds raised from sales led to the club sitting on a spare cash pile for three summer transfer windows, as the manager struggled to find sufficient 'top-top' players he wanted to join the squad.

This understandably fuelled frustration as Arsenal failed to compete for each season's trophies, compounded by the second issue which was that Arsenal's increasing wage bill (and player spend) did not deliver marked improvements with many of Arsène's signings in this period not working out (Chamakh, Wellington, Squillaci, Park, Santos and Gervinho). Inevitably this meant that the spotlight moved onto the quality of the squad the manager was choosing to construct - with still considerable resources being spent, particularly on player wages.

Tellingly, the manager has this summer spoken about the past impact of selling the club's best players and what a positive change in circumstances it is not to have to deal with that this summer and the resulting morale boost it gives to everyone at the club.  On top of this, the signing of a 'star' player on transfer deadline day has excited fans, players, management and wider Arsenal family, building on other good signings of established players. Much has rightly been made of this change in momentum.

With the changes toward a more judicious and effective use of wage expenditure and a major step forward utilising the cash reserves that Arsenal have in the transfer market, there is cause for optimism, but we need to see this progress continuing in both the January 2014 and summer 2014 transfer windows and in contract renewals with existing squad members.

Additional note

New Premier League Spending Rules: Short Term Cost Control

Rule E.18 states that

"If in any of Contract Years 2013-14, 2014-15 and 2015-16 a Club's aggregated Player Services Costs and Image Contract Payments:

E.18.1. exceed £52m, £56m, or £60m respectively; and [clearly Arsenal's do]

E.18.2. have increased by more than £4m when compared with the previous Contract Year or by more than £4m, £8m or £12m respectively when compared with Season 2012-13;

then the Club must satisfy the PL Board that such excess increase as is referred to in E.18.2 arises as a result of contractual commitments entered into on or before 31 January 2013, and/or that it has been funded only by Club Own Revenue Uplift and/or profit from player trading as disclosed in the Club's Annual Accounts for that Contract Year."

The definition of "Club Own Revenue Uplift" is set out at A.1.32 of the PL rules and means "any increase in a Club's revenue… when compared with its revenue in … 2012-13 (excluding Central Funds fee payments." ie revenue that is not PL TV money

The practical effect of the above is that only a £4m increase in the wage bill for PL clubs per season will be permitted. If a PL club spends more than an additional £4m on wages from the previous season, the additional wage cost can only be funded by increased commercial revenues that the club has made during that same season. The below table sets out the defined amounts: