Friday 23rd March 2018

AST Analysis of Arsenal Holdings PLC half Yr Accounts to November 2017

AST Analysis of Arsenal Holdings plc Half Year Accounts For the period 1 June 2017 to 30 November 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 2018 figures (and the split of football costs between wages and other football costs at the half year) being AST estimates.


6 mths to Nov 16

Yr to May 17

6 mths to Nov 17

Yr to May 18

Annual increase/(decr)





Est. to May 18


























Player loans





Football revenue











Total revenue





Football costs wages






Football costs other






Amortisation of squad










Property less jv share





Total costs





Operating profit/(loss)





Player sales










Profit before tax





Profit/(Loss) before player sales and property





Matchday revenues (gate receipts)

In the first six months of the current financial year there were 11 home games, four pre-season tour games and the Emirates Cup competition. This season there two Europa League group games as opposed to two B and one A-rated Champions League qualification game last season. There was no Emirates Cup in the summer of 2016.

The net effect of these changes was to decrease match day revenues for the period by £3m. The fall is down to the reduced pricing for Europa League group games partially offset by major gains from the tour matches and Emirates Cup competition.

In the second half of the season, Arsenal can play a maximum of 19 home games including two League Cup games and five Europa League games if they make it as far as the semi-finals. Last season was two games short of the season ticket minimum (26) and this season could go the same way if we lose to AC Milan (thus missing out on two further home knockout matches). 

A cautious estimate of match day revenues for the whole season is £94m, compared to last year's £100m.

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

Broadcast revenues

This is the second year of the current Premier League domestic TV deal (Sky and BT). Arsenal had ten televised Premier League fixtures in the first half of the financial year (last year eight) and played 14 rather than 13 Premier League fixtures. We estimate these factors added some £5m to broadcast revenues. 

However, missing out on the Champions League has an effect. Last season the club did particularly well financially as a result of the second-place finish in 2016, earning some €65m from Uefa over the full year. The Europa League offers drastically reduced prize money but a useful €42m-plus TV pool that we will only share with Everton, who did not qualify for the group stage. With no other English club dropping in from the Champions League (as they all qualified for the knockout phase) this could see us earn most of the pool dedicated to English teams. This is a stroke of good luck, but even a run to the final would only see earnings around the €45m mark, whilst a quarter final exit would see income nearer €35m.

For the full year we expect broadcast revenues down £29m at £170m. This is pretty catastrophic in terms of maintaining relative competitive positioning with Chelsea (let alone City and United).

Commercial and retail revenues

Commercial revenues fell by four per cent to £41m which was a surprise. The club attributed the fall to failure to qualify for the Champions League, meaning some commercial deals have CL bonuses attached to them. The run rate last year was pushing toward £90m pa but we cautiously estimate a fall to £83m in the full year figures.

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 40 per cent of the figures reported by Manchester United, which gives 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 over £200m 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.

Arsenal recently announced an extension to the Emirates shirt sponsorship deal from 2019 to 2024. No details were announced but the press reported a headline £40m a year figure with scope for a sleeve deal to be separately negotiated on top with another sponsor (in all seemingly a £20m pa increase on the current £25m pa deal assuming the club can achieve £5m pa for the sleeve patch - CFC and MUFC are reported to earn £8m pa for this 100 square centimetre patch). There are no indications as to whether failure to qualify for the Champions League will affect the annual payments but at headline level a £20m pa increase in commercial revenues would keep us in the second tier.

Immediate comparisons with Chelsea are not too favourable given they also have separate training kit sponsors as well as £40m from Yokohama and a separate sleeve deal, but given the team's current on-pitch standing this new deal does not seem terrible and the fact the announcement came hot on the heels of Ӧzil's contract renewal and the signing of Aubameyang is probably not a coincidence.

The Puma clothing deal that runs until June 2019 is reportedly being replaced with one from Adidas, but this is unconfirmed and the fact Puma apparently do not wish to renew is disappointing.

Property and player loans

The club signalled in the autumn that it had sold the Holloway Road site and revenue of £14m and profits of £5m were booked in the half year. The Hornsey Road site remains in the books at £8m and was planned for student accommodation. We estimate potential sale proceeds of around £20m.

In terms of loans, Perez and Campbell were the notable loanees, although generating under £1m in fees. More will follow in the second half when the bulk of the fees fall due.


Wages are reported as being up £13m from the same six months last year. Summer 2017 saw modest wage increases in the squad with Lacazette and Kolasinac joining, while Szczesny, Gibbs, Gabriel, Perez and Oxlade-Chamberlain left. Wilshere and Chambers re-joined the squad after loan stints. The manager renegotiated a new deal and the backroom staff continued to grow, with a number of new senior appointments made. However, most departures were in August so the club carried a bloated wage roll for three months in 2017, while summer 2016's big additions (Perez, Mustafi and Xhaka) were only on the payroll for part of the comparative six-month period. This is another reason for the jump in the wage bill.

In terms of the figures, this translates into an expected increase in wages to £225m for the full year, with no Champions League bonuses assumed to accrue.

January has seen more re-engineering including a new deal for Ӧzil, though we think the changes will have limited net impact by May unless there are some contract termination payments included in all the dealings with former players.

To a large extent, wages for all but the very best players have plateaued as a result of wage caps agreed by the Premier League. The clubs are all conscious of the risk of being stuck with players on wages other European clubs can't afford, but stellar names attract huge salaries, especially if moving at the end of contracts.

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

At face value, the loss of gate money and UEFA income was seen by some as potentially restricting Arsenal's ability to agree stellar deals for their top players, but they built up slack from enormous player sale profits and trimmed a lot from the wage bill in disposals, and as we foretold it was not an issue in re-signing Ӧzil on a reported €20m pa contract and Aubameyang and Mkhitaryan on €10m pa deals. However, these rules do explain clubs generally stringing out deals 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). In the past two seasons they have increased as the club does more touring and has increased partnership costs and back room support. 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 this financial year. 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 per cent higher at £44m due to the relatively high level of investment in the past two summers (approximately £60m gross in new players and contract renewals in 2017 and £115m in 2016). In the full year we expect an amortisation charge nearer to £96m, which reflects Arsenal's huge gross spending in the past two seasons on Mustafi, Xhaka, Perez, Lacazette and Aubameyang plus the Ӧzil renewal and a squad carrying value of well over £500m at cost come 31 May 2018.

Profit on player sales

Arsenal booked a profit of £59m from selling Oxlade-Chamberlain, Szczesny, Gabriel and Gibbs and have more profits to come (probably another £60m) from selling Walcott, Coquelin, Giroud and Sanchez, whose swap for Mkhitaryan will be accounted for as a sale and purchase at fair value (probably £30m). 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 a few years ago) or because of failure to qualify for the Champions League (Chelsea last year and possibly Arsenal this season). Ordinarily with Arsenal a buyer of mature talent as well as a buyer of developing talent, one would expect profits from player sales to be less significant than in the past unless dissatisfied star players force exits. The extent to which the sales of the Ox, Walcott and Giroud were forced may be up for debate but clearly the players were motivated to accept a move to further their careers and their transfers attracted big profits as they were long standing squad members whose book value was practically nil and who were purchased before the recent jump in prices the latest TV deal has inspired.

'Spare Cash' / Resources available to strengthen the team

Arsenal reported cash reserves at 30 November 2017 of £136m - with further cash of £23m held back to guarantee debt service requirements. This was a modest decrease on cash reserves held in May (£180m total; £144m net of debt reserve) and reflected the net proceeds from transfer dealings over the summer (£9m) offset by instalments due on past player purchases (previously believed to have been £20m).

The club has said little about amounts still due on player purchases at 30 November 2017 and provide no detail in the notes to the accounts for us to make educated estimates. We know from May 2017's accounts there should be a further £23m to pay on player purchases plus the combined impact of the summer and winter's business, which was considerable but very little on a net basis. However, there may well be considerable provision for agent fees due on the life of new player contracts in long term provisions (perhaps £20m in all for the whole season's net transfers). 

In the autumn we estimated spare cash before the impact of the summer's transfers at £83m and believe this is a cautious estimate of free cash at the end of November 2017 too.  We estimate that cash balances will grow in the second half of the financial year to somewhere in the region of £180m come 31 May 2018. However, we believe the free cash level net of all future player payments and working capital needs for season 2018-19 will fall to around £70m. This fall is principally down to factoring in all future player payments even if some are spread beyond the next year.

This is still a lot of fire-power and technically some wage capacity exists too, but the Board will have an eye to annual operating free cash flow before transfer payments and receipts, which is down at around £30m pa. This is in effect the long-term sustainable level of net transfer activity until the new sponsorship deals arrive in 2019.


Relative competitive financial standing

From 2013 until 2017 Arsenal enjoyed a period of relative financial improvement with revenues and wages increasing by roughly a third and significant net investment in the squad (over £300m at historic cost). This coupled with a reining back of expenditure by Chelsea and Manchester City as FFP and EPL wage rules bit led to a narrowing of the wage bill differential. In 2018 this will change as Arsenal endure a 10 per cent fall in income from dropping down into the Europa League. 

Arsenal have few opportunities to improve their financial standing relative to their competitors other than by requalifying for the Champions League and buying stars that raise the club's profile and sponsorship potential. With sponsorships now locked in until 2024 and the TV deal looking like delivering flat revenues until 2022, Arsenal's potential for revenue growth really is restricted to performance alone.

We have long argued that Arsenal's relative financial position was at risk by virtue of their reliance on Champions League income to maintain their visibility to sponsors and spending on the squad. Arsenal lacked the revenue cushion of Manchester United and the deep pockets of the owners at Chelsea and Manchester City, who have been free again to invest modestly to protect their teams following UEFA's apparent back-tracking on FFP. Like Liverpool before them, Arsenal will be exposed by a prolonged absence from the Champions League.

Arsenal's under performance in 2017 and 2018 now means they will have to overperform to get back into the top 4.

In terms of threats, we foresaw three main problems last spring:

·         The risk stars agitate to leave if there is no success (as happened with Sanchez)

·         The risk they lose out on a Champions League place in an ever more competitive league (as happened at a cost of over £30m net)

·         The risk others who increase gate revenues (Chelsea, Liverpool and Spurs) and/or qualify more regularly for the Champions League will be able to spend more on wages

These risks remain and things could get worse for Arsenal financially comparative to the rest of the big six, especially if they drop out of even the Europa League or have to share more of the Europa League revenues with other participating English clubs.

So what have management done in the face of these risks and the loss of over £30m in net income? Well, Arsenal threw the kitchen sink at the January 2018 transfer window, signing a mature star name in Aubameyang and renewing Ӧzil's contract, thereby aiming to keep the team competitive and attractive to both sponsors and other players who would like to play alongside such proven talents. This was good execution of probably the best option available in January to the club. Arsenal have spent a good £220m on five big signings (Xhaka, Mustafi, Lacazette, Mkhitaryan and Aubameyang) and committed tens of millions in salaries on top to these players and to Mesut Ӧzil (say £60m pa in wages) and they need this core to substantially work out on the pitch as they will be hard to move on if they don't perform.

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 £70m)

·         The amount raised by involuntary player sales (obvious risks are Ramsey and Bellerin)

·         Wage capacity used on those urgently needing new deals (Ramsey?)

·         The amount of income at risk next season from a Europa League place (none hopefully, but £30m rides on it)

·         The amount generated and wages freed up from voluntary sales (Welbeck, Elneny and most of the defence are all possible candidates)

This is clearly still a substantial amount and allows scope for further changes in the squad.

In summary

In March 2016 we commented that Arsenal were in a situation where they needed 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 the Premier League TV deal. 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 had done.

The team didn't perform but few were moved on. Arsenal spent big in summer 2016 but again failed to see material on-pitch benefits from their investment. They were finally pushed in to clearing the decks and reinvesting this season in two distinct waves of activity (January's action came after the first wave in summer failed yet again to yield any benefits). 

Whilst churn is welcome in the face of non-performance, the one thing that has not changed is the manager, who must be running out of chances. The past two seasons have shown new managers and coaches can sometimes get a lot more out of playing squads and budgets than their predecessors, and Arsène has definitely had a lot of money spent on his team since 2013 and cannot argue he has not had the time or resources to rebuild.


AST, March 2018

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