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AST Analysis of Arsenal Holdings PLC Half Year Accounts for period 1 Jun 2016 to 30 Nov 2016

Posted Tuesday 28th February 2017

This 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 2017 figures (and the split of football costs between wages and other football costs at the half year) being AST estimates.

£millions

6 mths to Nov 15

Yr to May 16

6 mths to Nov 16

Yr to May 17

Annual increase

 

Actual

Actual

Actual

Estimate

Est. to May 17

Revenues:

 

 

 

 

 

Matchday

41

100

46

102

2%

Broadcast

60

140

85

200

42%

Commercial

41

82

43

86

4%

Retail

14

25

15

25

0%

Player loans

2

3

2

5

 

Football revenue

158

350

191

418

20%

Property

2

3

1

1

 

Total revenue

160

353

           192

          419

 

 

 

 

 

 

 

Costs:

 

 

 

 

 

Football costs wages

91(e)

195

101(e)

210

7%

Football costs other

33(e)

70

35(e)

72

3%

Amortisation of squad

29

59

36

74

 

Depreciation

7

15

7

15

 

Property less jv share

0

0

0

0

 

Total costs

160

339

179

371

 

 

 

 

 

 

 

Operating profit/(loss)

0

14

13

48

 

Player sales

0

2

6

6

 

Interest

(6)

(13)

(7)

(13)

 

Profit/(Loss) before tax

(6)

2

12

41

 

 

 

 

 

 

 

Profit/(Loss) before player sales and property

(8)

(2)

5

35

 

Matchday revenues (gate receipts)

In the first six months of the financial year there were 12 home games, 4 tour games but no Emirates Cup competition. Compared to last year, there was one more C rated fixture and two League Cup games. 

The net effect of these changes was to increase match day revenues for the period by £5m. League cup games provide very little net revenue but the extra club level revenue attributed to them and the extra C game and tour games more than compensated for the absence of the Emirates Cup. In the second half of the season, Arsenal will play a further 14 home games.  Compared to last season this will be two games short of the season ticket minimum (26) but within the mix there will be two extra A games compared to B games and there will be two fewer FA cup games which involve the club sharing 55% of match day revenue with the other club and FA.  Overall we estimate match day revenues will be a net £102m compared to last year's £100m due to these perverse factors.

Matchday income remains one of Arsenal's main sources of competitive advantage compared to rivals such as Spurs (£40m), even allowing for associated debt and hosting costs which is why other clubs have been investing in new stadia.

Broadcast revenues

This is the first year of the new Premier League TV deal (Sky and BT). Arsenal had eight televised Premier League fixtures in the first half of the financial year (last year ten) and played 13 rather than 14 Premier League fixtures.  We estimate the new deal added £18m despite the lower number of games played and televised.  The club again played five Champions League games but earned an extra 10% of the fixed TV pool money by virtue of their second place finish last season and benefitted from a better GBP/Euro exchange rate securing a further £7m increase in broadcast revenues and making a combined increase for the first half of £25m from £60m to £85m.

For the full year we expect the combined impact of the new Premier League deal and extra Champions League revenues to push broadcast revenues up toward £200m.  Over the past four years broadcast revenues will have grown by over £100m. 

Commercial and retail revenues

Commercial revenues increased by 5 per cent to £43m and are expected to be £86m at year end.

Whilst the two headline deals with Emirates and Puma are significant (at £25m pa and £30m pa respectively), Arsenal's commercial and retail income is still only 50 per cent of the figures reported by Manchester United whose new kit deal with Adidas (£75m pa) together with other commercial revenues will give them a £150m pa spending advantage over Arsenal.

Arsenal also lag behind the commercial revenues reported by Bayern, Barcelona and Real Madrid who all earn close to £200m pa and the two state sponsored clubs (PSG and Manchester City) who receive well over £170m pa in commercial revenues. 

Arsenal sit tenth in the European Club table of commercial income meaning they are in the second tier of commercial income earners behind the likes of Chelsea, Dortmund and Liverpool, who all receive around £100m pa, but well ahead of clubs like Spurs who are not Champions League regulars and earn around £60m pa.

Sadly, the game at the top level in Europe is becoming increasingly polarised. The super-rich Clubs are generating ever larger commercial success off the pitch through sponsorships and merchandise sales linked to success in the Champions League with its large bonus and TV related payments.

Property and player loans

The club is still working on the sales of the Holloway Road and Hornsey Road sites which should realise in excess of £10m once planning consents are obtained. 

In terms of loans, Szczesny was joined by Wilshere, Chambers and Campbell as notable loanees but only modest loan fees have been received on these deals which is disappointing but suggests the players wages are relatively high.

Wages

Summer 2016 saw modest wage increases amidst a reshaping of the squad with Xhaka, Mustafi and Lucas joining and Arteta, Rosicky and Flamini leaving.

In terms of the figures, this translates into an expected increase in wages to £210m for the full year.

To a large extent, wages have plateaued as a result of wage caps agreed by the EPL. The clubs are all conscious of the risk of being stuck with players on wages other European clubs can't afford.

The latest set of restrictions allow Premier League clubs to increase wages by no more than £7m pa unless they had cumulative non-PL TV revenue increases (commercial or gate money) and/or player trading profits to cover any excess.

At face value this could restrict Arsenal's ability to agree stellar deals for their top stars but they will build up slack from the higher Champions League revenues this season and player sales and it is not likely to be an issue.  However, these rules do explain clubs in general stringing deals out longer for the bulk of their squads.

Non-wage Football costs and Amortisation

Non-wage football costs cover team support, travel, medical costs, stadium running costs, insurances and retail costs of sale (running costs of The Armoury, cost of shirts etc). They are remarkably constant other than being slightly impacted by the number of home games held, tours held and retail costs of sales. In the years ending May 2014 and 2015, there was the inclusion of a £3m fee paid to KSE for advisory services and it is unclear from these interim figures if a fee has been levied in the first half of the financial year or will be levied by the financial year end. We remain unconvinced of the true value of the services represented by the KSE fee in the past as the club's statements on this have failed to provide any coherent explanation of the services provided.

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 half year to November was 20% higher at £36m due to the relatively high level of investment in the summer (approximately £110m gross in new players and contract renewals). In the full year we expect an amortisation charge nearer to £74m, which is close on Arsenal's average annual spend on new player recruitment plus contract uplifts / extensions over the past four years.

Profit on player sales

Arsenal booked a small profit from selling Gnabry and Hayden (£6m). Most of the clubs competing at the top of the game have traditionally not relied on player sales for income, although some have begun to resort to generating profits in this way to balance the books for either FFP reasons (Chelsea and arguably even Man City) or because of failure to qualify for the Champions League. 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 remain less significant than in the past unless dissatisfied star players once again force exits.

'Spare Cash' / Resources available to strengthen the team

Arsenal reported cash reserves at 30 November 2016 of £100m - with further cash of £24m held back to guarantee debt service requirements. This was a significant decrease on cash reserves held in May (£193m total) and was some £30m lower than we expected because more of the transfer fees incurred in the summer were paid up front than is usual.

The club drew attention to a further £42m being payable within the next year on existing commitments for players and a further £23m thereafter.  Nearly all of this outlay is expected to fall in the summer months after the receipt of next seasons season ticket money but even on a crude basis there remained approximately £60m of cash in reserve at 30 November 2016.

Looking forward to May 2017 we estimate that the residual cash available will grow in the second half of the financial year, which contains the bulk of TV revenues together with Platinum and Gold Season Ticket renewals to somewhere in the region of £120m come 31 May 2017 and the headline figure to somewhere in the region of £190m.

Relative competitive financial standing

Arsenal have enjoyed a period of relative financial improvement over the past three seasons with revenues and wages increasing by roughly a third and significant net investment in the squad (over £180m at historic cost). This coupled with a reigning back of expenditure by Chelsea and Manchester City as FFP and EPL wage rules bit led to a narrowing of the wage bill differential. There's still a slight difference but it is telling that the gap in performances on the pitch narrowed over this period.

Arsenal have few opportunities to improve their financial standing relative to their competitors other than by winning the Premier League or Champions League and buying stars that raise the club's profile (sponsorship potential). They can't increase gate revenues, already rely on Champions League income for £50m of income and are constrained by the new wage cap which is pushing Arsenal into "enforced" profit.

However, Arsenal's relative position is arguably at risk by virtue of their reliance on Champions League income to maintain their spending on the pitch and their high visibility to sponsors. Arsenal lack the revenue cushion of Manchester United and the deep pockets of the owners at Chelsea and Manchester City, who are now free again to invest modestly to protect their teams following UEFA's apparent back-tracking on FFP, and like Liverpool before them, Arsenal are exposed to a prolonged absence from the Champions League .

In terms of threats, they face:

·         The risk stars will agitate to leave if there is no success this season

·         The risk they too might lose out on a Champions League place in an ever more competitive league

·         The risk others who increase gate revenues (Chelsea, Liverpool and Spurs) will be able to spend more on wages, as will those getting in to the Champions League.

Of course, if they can get more out of their wage bill (currently £210m pa) compared to their rivals (eg Spurs £120m pa) that might not matter, but there is again the suggestion that Arsenal have players on their books earning wages other clubs would struggle to justify (Walcott £140k pw; Szczesny at or close to six figures) and that readjustment could be painful.

Moreover, whilst in the past Arsenal protected themselves by buying very well relative to their peers, that advantage has now gone and is seemingly enjoyed by others outside the old top 4 (notably Spurs), so it is our assessment Arsenal are exposed to downside financial risks.

Capacity to invest in the summer

Capacity to invest in the summer will be a product of:

·         The amount of spare cash available (we suggest £120m)

·         The amount raised by involuntary player sales (obvious risks are Sanchez, Özil and Bellerin)

·         Wage capacity used on those urgently needing new deals (Oxlade-Chamberlain, Sanchez and Özil are all being mentioned as of course is the manager)

·         The amount of income at risk next season from a Champions League play-off (none hopefully, but £30m rides on group-stage qualification)

·         The amount generated and wages freed up from voluntary sales

In summary

Last year we commented that Arsenal were now in a situation where they need to focus on winning trophies and being more successful with the resources in hand as this is the key driver to any future substantial growth in revenues outside of the Premier League TV deal and to retaining their stars. The pressure should very much be on the players to perform or to be moved on to generate revenues to be reinvested, much as Chelsea and United have done.

Last summer Arsenal spent big but have so far failed to see material on pitch benefits from their investment and now risk having some of their best players agitating to leave at a time of uncertainty as to whether the manager will continue or not.  That in itself need not be something to fear as the past two seasons have shown new managers can sometimes get a lot more out of playing squads and budgets than their predecessors (Conte and Pochettino most notably).

AST, March 2017