Thursday 5th March 2020

Analysing Arsenal's Full Yr Accounts to May 2019


Analysis of Arsenal Holdings PLC

Full Year Accounts for the financial year 1 June 2018 to 31 May 2019

The following report is a short analysis produced by AST member Simon Hill examining the financial performance of Arsenal Football Club for the financial year ending 31 May 2019.

As usual Simon starts with a simplified version of the club’s accounts in table format. The figures are all drawn directly from the published accounts, which are available on Arsenal.com.

£millions    

Year to May 2018

Year to May 2019

Revenues:



Matchday

99

96

Broadcast

180

183

Commercial & Retail

107

111

Player loans

2

5

Football revenue

388

395

 

 

 

Property

15

1

Total revenue

403

396

 

 

 

Costs:



Football costs wages

240

235

Football costs other

88

86

Amortisation of squad

92

91

Depreciation

16

15

Property & loans

9

1

Total costs

445

428

 

 

 

Operating profit/(loss)

(42)

(32)

Player sales and JV share

121

12

Interest

(9)

(12)

Profit/(Loss) before tax

70

(32)




Profit/(Loss) before player sales & property

(57)

(44)


Comparison with previous estimates

In my last update in June 2019, we gave an estimate that Arsenal would report a loss before tax of £49m for the full financial year. The actual loss was £32m.  The main reason for the difference is profits recorded on player sales of £12m and higher broadcast revenues from the run to the Europa League final.  The profit on player sales is a surprise as it was mainly academy players who were sold last year.

Stadium revenues (match-day)

The slight fall in matchday revenue of £3m is down to the absence of the Emirates Cup competition offset in part by more tour games, an extra home FA Cup game but one less League cup game and higher average attendances. 400 extra Club level seats were added but the suspicion is demand for premium seats is weak with plenty always on offer for special packages.

Broadcast revenues

Broadcast revenues grew by £3m due to the club’s run to the Europa League final which saw Arsenal earn £37m from that competition.  By comparison Spurs earned over E100m from their participation in last season’s Champions league final plus substantial commercial sponsorship bonuses.

Commercial revenues

Despite the new shirt sleeve deal with Rwanda that was worth a reported £10m pa, commercial and retail revenues (which are now reported on a combined basis by the club) only grew £4m to £111m. The reason for this disappointing figure is unexplained but may be related to the fact the Puma deal was in its final year and shirt and merchandise sales may have been poor.

The club has announced new deals with Emirates and Adidas from season 2019/20 which at a headline level are expected to add £45m pa but the extent to which these increases will be tempered by penalties for failing to qualify for the Champions league is unknown, However, from the previous drop in commercial income we estimate this at 20%.

In commercial revenue terms, the Club seriously lagged Spurs and Chelsea in 2019 (by 20% and 30% respectively).

Property and player loans

The Hornsey Road site remains in the books at £8m and was planned for student accommodation. Nothing is certain on the timing of this sale.

In terms of loans; Chambers and Ospina were the notable loanees, generating £5m in fees.  The treatment of the fee paid to loan Dennis Suarez is unclear to us. We suspect the loan fee paid was added to the amortisation charge for the year.

Wages

The headline wage bill including £3m in further severance payments decreased by £5m to £235m. The underlying wage bill of £232m represents a significant increase on the previous season (£9m) and is a result of the considerable number of changes both on and off the field.

Off the field we had Mislintat leave the senior football management team and Ivan walk out on the club he had just helped to heavily restructure with Vinai subsequently promoted alongside Raul as head’s of commercial and football activities respectively. We understand their combined salaries are broadly similar to Ivan’s remuneration. We also saw one in five of the training team sacked (19 people) following Arsene’s departure in May 2018.

On the field we saw further churn in the squad with Mertesaker, Cazorla and Wilshere released, Ospina and Chambers loaned out and Torreira, Leno, Sokratis, Guendouzi and Lichsteiner added. There was also the full year impact of the January 2018 addition of Aubamayang and Mesut Ozil’s massive pay rise so the rise in core wages was not unexpected.

The Premier League wage cap ceased to be an issue for Arsenal though FFP remains a constraint through restricting the size of any losses Arsenal can regularly incur (see below).

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) plus the costs of supporting tours and sponsors events. 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).

In 2016 the KSE fee was waived and other costs fell back to £70m but in 2017 they leapt alarmingly to £79m and then again in 2018 to £88m. In the accounts for 2017 the club talked about US tour costs, sponsorship partner costs, the legends match proceeds and a £1m provision against empty property which all seemed a slightly lame way to get to a £9m increase, especially in a season with so few home games but then again another huge increase was seen that we put down to touring costs, hosting costs and sponsorship payments. There is no KSE fee so that is not a contributing factor, and we remain slightly perplexed about this dramatic increase but believe that in effect a lot of extra revenue from touring and pre season games and from secondary sponsorships is matched by big expenses that leave little contributed on a net profit basis.

In this regard the fall in other costs in 2019 by £2m to £86m was expected as there was no Emirates Cup and the consequent fall in revenue was largely matched by lower costs.


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.  We suspect it also includes any loan fees Arsenal pay for a player (like Suarez or Cabellos).

The charge this year decreased from £92m to £91m largely because of a £5m fall in specific provisions against the value of players (we suspected Perez who was bought in 2016 and sold in summer 2018 to West Ham was heavily provided for in 2018).

Aside from this one off factor the underlying charge increased to £90m which was expected given Arsenal’s heavy investment in new players in recent years.  £99m in gross additions was reported in the accounts for 2019 and in the last three seasons the cost base has increased from £340m to £520m and looks set to reach £600m by May 2020.

As a minimum, we would expect the club to spend the amount of the annual amortisation charge (£90m) on new players every season.  The club’s accounts reveal net spending in Summer 2019 of £93m with a gross spend of probably nearer £140m to be added to the player cost base in 2020.  Arsenal are clearly spending toward the limit of their means.

Profit on player sales

2018 saw unprecedented churn in the first team squad with 9 sold and 4 bought. Because the club was selling players held for a long time their sale generated huge profits (£120m) that was reinvested in fewer players (in broad terms £139m was raised and £166m spent).  

2019 saw the sale of Perez for his written down cost and the sale of a number of academy players (The Jeff, Chuba Akpom, Joel Campbell, Mavididi etc) which surprisingly seems to have realised £12m in profits.  We suspect some of these profits may have been from sell on fees as well.

In the past I argued really large profits should not be regularly earned unless you are operating in a rising market or you are making strategic decisions to raise cash to allow you to step up your squad (Leicester selling Maguire, Liverpool selling Coutinho) or because you are unable to keep your rising stars (Arsenal of old). I think now every club seeks a balanced approach with academies expected to generate first team players and contribute regular profits whilst first team squad sales of rising talent or mature talent is sometimes used to plug FFP losses (think Chelsea and Arsenal with Iwobi) as well as fund upgrades.

Squad trading is therefore a key skill top teams need to master hence the move to directors of football, integrated academies etc.

Cash

Arsenal reported a headline decrease in cash balances of £64m to £167m which was largely due to the delay in sending out season ticket renewal requests until after 31 May due to the Europa league final having offered the prospect of a return to the Champions League and increased season ticket prices. This is believed to account for approximately £40m of the decline.

These up-front season ticket payments are needed to pay some of the wages and bills for the rest of the season (“working capital”) but the fact they are missing this season means there is no need to set further cash aside for working capital in our assessment of cash available for investing in the squad.

That said, there are always a number of other items that use up cash held at year end. These include:

  • An allocation of cash on the balance sheet (£36m) 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 £81m). In the next year we estimate that approximately £30m net is due to go out as most is due in more than a year’s time.
  • Money due to be paid out for the annual debt repayments (I estimate £9m).
  • Payments for players acquired in the summer net of receipts from players sold. At a headline level these are quoted by the club at £93m. Not all this amount will have been due straight away, and given the fact that most of the money went on top money for Pepe and a player loaned back to the selling club we believe based on past experience it is fair to assume 75 per cent will not be due for at least another year. Accordingly, I have estimated £23m as being the maximum up-front outlay the club incurred.

So to summarise, set out below is my take on Arsenal’s current cash position:


Cash 

£167m

Debt reserve (service)

£36m

Working capital

£-m

Net player payments due 2019-20

£30m

Tax and debt payments

£9m

One off factors

£-m

Spare Cash

£92m

Net spent – summer 2019

-£23m

Residual Cash

£69m


Accordingly, we estimate around £69m remained spare at the end of this summer’s transfer window although would like to emphasise there are at least a further £121m of net future payments still due on players in 2020/21 and beyond.  We would also note that at least £65m of this cash was sitting in the Arsenal Property companies and whilst we are always assured it is available for investment in the club it somehow never ever seems to get spent…

Of course, trading during the course of the current season will also generate cash at the end of the season when season ticket renewals are received to go toward next summer’s spending (we estimate approximately £60m) and that would add to any unspent monies at the moment net of cash needed in 2020/1 to meet some of those £121m of existing player purchase commitments.  That is impossible math but it is likely to mean Arsenal could afford maybe £60m of net spend on instalment terms (failure to qualify for the Europa League could put a big dent in this).

Future financial performance: Estimate of Arsenal Holdings Plc full year accounts for the year ending 31 May 2020

With such a long period having passed since the year end (nine months) we thought it useful to consider what this season’s results will look like so members get a more current appraisal of the situation.  This is set out below with brief explanations of the major changes we anticipate.


£millions    

Year to May 2019

Year to May 2020

Revenues:

Actual

AST estimate

Matchday

96

92

Broadcast

183

169

Commercial & Retail

111

146

Player loans

5

5

Football revenue

395

412

 

 

 

Property

1

-

Total revenue

396

412

 

 

 

Costs:



Football costs wages

235

230

Football costs other

86

86

Amortisation of squad

91

110

Depreciation

15

15

Property & loans

1

-

Total costs

428

441

 

 

 

Operating loss

(32)

(29)

Player sales and JV income share

12

45

Interest

(12)

(12)

Profit / (loss) before tax

(32)

4




Loss before player sales & property

(44)

(41)

 

Broadcast revenues

Arsenal and Chelsea shared the lion’s share of Europa League money as the only other English club in the competition performed poorly (Burnley). This season they will have to share with Man United and Wolves and were knocked out of the competition 4 rounds earlier. We assume a substantial fall in earnings from this source.  There is however, a new EPL TV cycle which offers a gain from overseas TV rights less a probable reduction in earnings from finishing below last season’s fifth place.

Commercial and Retail

The club will benefit from the new and renewed sponsorship deals with Emirates and Adidas but as noted earlier some of this benefit will be lost as the club remains outside the Champions League places. Accordingly, we have assumed commercial and retail income will rise by £35m in 2020.

Wages

Once again in the summer there were considerable changes in the on field and off field personnel which will impact on the wage bill.

Off field, Emery and his immediate coaching staff were sacked, Edu joined in the summer and Arteta in December.  There is a lot of conflicting debate about the length of Emery’s contract and we have taken a cautious approach and assumed he and his team qualify for eighteen months salary in compensation (£12m).

On field: Welbeck, Cech and Ramsey left when their contracts expired; Iwobi, Koscelny, Monreal and Ospina were sold, Elneny and Mkhitarian left on loan and Pepe, Tierney, Martinelli and Luiz joined.  Saliba also joined but was loaned back for a season. 

On balance I think there will only be a modest decrease in wages due to the compensation payable to Emery and his coaching staff.

Profits on player sales and amortisation

Considerable profits are expected from the sales of Iwobi, a number of academy players and sell on fees (£45m).  The considerable additions to the carrying cost of the squad are expected to lead to an amortisation charge up £20m to £110m.

Overall result

The overall result anticipated is a profit of £4m compared to a loss of £32m.  The £45m of profits from player sales is the driving force and this will help with FFP constraints.  Longer term, an absence of termination payments will help but further player sales are to be expected in our opinion next summer, especially if we fail to qualify for the Europa league.

Overall financial performance: what does it mean for Arsenal? 

In 2013 Ivan Gazidis spoke about Arsenal becoming like Bayern Munich, one of Europe’s elite clubs. Sadly, the latest Deloitte Football Money League published in January 2020 and based on Europe’s top club’s revenue for the season ended May 2019 shows that as we predicted last year Arsenal have dropped out of Europe’s top ten clubs and have fallen significantly behind all our main English rivals (including Spurs- a club Peter Hill Wood refused to see as serious competition back in 2015).

Set out below is a table showing the revenues in Euros of us and our rivals for 2018/19:



Revenue Euro m’s

Europe wide ranking

Manchester United

711

3

Manchester City

610

6

Liverpool

605

7

Tottenham

521

8

Chelsea

513

9

Arsenal

445

11


By way of further comparison, Bayern Munich sit fourth in the table on revenues of E660m and have commercial revenues of E357m, Liverpool have commercial revenues of E211m Spurs E152m and Arsenal E126m.

Although the new commercial contracts should add E40m to revenues from 2019/20, Arsenal will still firmly be playing catch up unless there is a return to the Champions League and may end up back where they are at the moment if they cannot even manage to qualify for the Europa League.

To the author, it is hard not to look at the club’s relative standing and weep.  The club’s owner and Directors wasted 10 years of relative financial strength telling themselves they were doing a good job and still had the right man whilst the club slowly subsided into the second tier of clubs.

Whilst at least Ivan and Arsene have finally gone, there is little sign that things are any better under Raul’s guiding hand and this is the author’s current main concern.  That it took a further 16 weeks to change a coach who palpably failed over the last six weeks of the proceeding season beggars belief.  The appointment of Arteta and Edu really is a last roll of the dice. Failure to qualify for the Europa league will cost the club at least £30m and surely result in sales of top players to plug the gap and a big struggle thereafter to regain a place in even Europe’s secondary competition.

Simon Hill, March 2020



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