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AST review of Arsenal's financial reports for 2017/18

Posted Monday 11th February 2019

AST Analysis of Arsenal Holdings PLC

Full Year Accounts for the financial year 1 June 2017 to 31 May 2018

 

The following report is a short analysis produced by Simon Hill who is a member of the Arsenal Supporters' Trust (AST) examining the financial performance of Arsenal Football Club for the financial year ending 31 May 2018.

Usually this report would have appeared in September 2018 but now the Club has been taken private these results are published a few months later and with less detail than previously. There is also no AGM at which questions about the accounts can be asked. The report can be read here.

As usual we start 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 2017

Year to May 2018

Revenues:

 

 

Matchday

100

99

Broadcast

199

180

Commercial & Retail

117

107

Player loans

7

2

Football revenue

423

388

 

 

 

Property

1

15

Total revenue

424

403

 

 

 

Costs:

 

 

Football costs wages

200

240

Football costs other

79

88

Amortisation of squad

77

92

Depreciation

15

16

Property & loans

1

9

Total costs

372

445

 

 

 

Operating profit

52

(42)

Player sales and JV share

7

121

Interest

(15)

(9)

Profit before tax

44

70

 

 

 

Profit/(Loss) before player sales & property

37

(57)

 

 

Comparison with previous estimates

In our February review of the half-year figures, we gave an estimate that Arsenal would report a profit before tax of £71m for the full financial year. The actual profit was £70m.

Stadium revenues (matchday)

The slight fall in matchday revenue of £1m is due to the reduced pricing for Europa League group games (app £9m pa) being largely offset by major gains from extra tour matches, hosting the Emirates Cup competition and having to share less revenue from playing fewer FA Cup home games. There are significant extra costs included in other operating costs (up £9m this year) from the costs of hosting extra pre-season games. These games contribute little on a net profit basis but do flatter headline revenue figures.

Broadcast revenues

Broadcast revenues fell by £19m due to the club's absence from the Champions League.  The club still generated €38m in Europa league income thanks to a run to the semi-final and a poor show from the only other English club to play in the competition (Everton). By comparison Spurs earned €61m from their participation in last season's Champions League and can expect to earn even more this season as substantial increases in Champions League revenue distributions have been announced.

Commercial revenues

Commercial and retail revenues (which are now reported on a combined basis by the club) fell £10m to £107m. In recent seasons the club has explained at some length how they were growing secondary sponsorships (to £23m in 2017) but that level of detailed explanation is now missing from the accounts. However, we do know from the last set of published half-year accounts that the drop in commercial revenues was driven by the club's exit from the Champions League, and know there is also the absence of FA cup winnings (£3m) which were included in 2017's figures.

The club has announced new deals with Emirates and Adidas from season 2019-20 and Rwanda for season 2018-19, which at a headline level are expected to add £55m pa, though the extent to which these increases will be tempered by penalties for failing to qualify for the Champions League is unknown.

Property and player loans

During the year the club sold the Holloway Road site and revenue of £15m and profits of £6m were booked. 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, Perez and Campbell were the notable loanees, generating £2m in fees.

Wages

The headline wage bill increased by £40m to £240m although this was distorted by exceptional provisions of some £17m relating to the departure of Arsène Wenger and most of his coaching team. We suspect those amounts will predominantly be paid out over the last year of Arsène's contract during 2018-19. The underlying wage bill of £223m still represents a significant increase on the previous season (£23m) and is a result of the considerable number of changes both on and off the field.

Off the field we had Sanllehi and Mislintat join the senior football management team, a probable pay rise for Arsène following his new contract in May 2017 and further investment of £1m in Ken Friar's pension fund.

On the field we saw unprecedented changes with Szczesny, Gabriel, Gibbs, Oxlade-Chamberlain, Coquelin, Debuchy, Walcott, Sanchez and Giroud all leaving, and Lacazette, Kolasinac, Aubameyang and Mkhitaryan joining. Chambers and Wilshere returned from loan and Ӧzil received an increase in his reported wage to £350,000 per week.

Broadly speaking, these changes resulted in fewer players earning a lot more money. Some of the most dramatic changes last January appear to have been motivated by helping to reassure sponsors Arsenal could still attract big names, especially with those big sponsorship deals being renewed at the time.

One issue we would like to address is the Premier League wage cap, which numerous bloggers and the odd newspaper have from time to time used to explain Arsenal's reluctance to renew Ramsey's contract or buy more players in the January 2019 transfer window (and to a lesser extent last summer). Basically, the rules restrict increases in wages to a maximum of £7m per annum for the duration of the TV deal plus any increases in non-Premier League income and average transfer profits referenced back to season 2012-13. This is a piece of complex maths even for club insiders let alone external analysts, but our estimate as of season 2018-19 is that Arsenal's current cap is around £260m. That suggests headroom of over £30m pa.

Non-wage football costs ("Other Costs")

These cover running the team (travel, medical costs, etc), stadium running costs, insurances and retail costs of sales (stock and running costs of the Armoury, etc). For many years they had been remarkably constant (£57-62m pa), changing only marginally to reflect the number of games and other 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), and the £3m payment to KSE was repeated.

In 2016 the KSE fee was not paid and Other Costs fell back to £70m but in 2017 they leapt to £79m and then 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. For 2018 we put the increase down to touring costs, hosting costs and sponsorship payments. There is no KSE fee in either year 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.

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.

The amortisation charge this year increased from £77m to £86m with a further £6m specifically provided against the value of an unnamed player (we suspect Perez who was bought in 2016 and sold in summer 2018 to West Ham). As a minimum, we would expect the club to spend the amount of the annual amortisation charge (£86m) on new players every season. The club's accounts reveal net spending in Summer 2018 of £61m with a gross of probably nearer £70m, which probably reflects the fact that with such large underlying losses being incurred the club cannot sustain the level of investment recently seen in the squad (close on £300m on new players and improved contracts from summer 2016 to January 2018).

Profit on player sales

As has already been noted, 2018 saw large churn in the first team squad, with nine sold and four 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). This reflected a mix of higher market prices for top level strikers and upgrades being sought, and was balanced in squad terms by some promotions from the youth ranks and the return of some loan players.

Profits should not really be earned regularly unless you are operating in a rising market (which we were) or you are farming young talent for sale or unable to keep your rising stars (Arsenal of old).

Cash

Arsenal reported a headline increase in cash balances of £51m which surprised us as on a pure trading basis we would have expected little change (what Arsenal generated in profits and raised in player sales was broadly matched by what they spent on new players and debt service). The basic reason for the increase was favourable changes to working capital (debtors and creditors-excluding those related to player sales and purchases), which ordinarily should only change for short term reasons (ie timing issues which reverse later). This is discussed in greater detail below.

Arsenal's end of financial year (May 31) headline cash figure (£231m) is always bloated by up-front season ticket payments that are needed to pay some of the wages and bills for the rest of the season ("working capital"). This amount is harder than ever to assess but as the club will trade at a substantial loss next season we believe £50m should be set aside.

There are also a number of other items that will use up the 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 £62m). In the next year we estimate that little net is due to go out as most is due in more than a year's time.

·         Money due to be paid out for corporation tax and the annual debt repayments (we estimate £9m).

·         One-off factors: favourable movements in working capital that added to cash balances at the end of 2018 (£58m). Some of these movements will continue into next season (like the fall in stock values from selling one of the properties and fall in debtors from having less due from UEFA at year end) but other changes like those relating to the increase in creditors are harder to understand. Deferred income and accruals went up from £150m in 2017 to £177m in 2018. This balance usually relates to money paid in advance by key sponsors like Emirates and Puma, to season ticket renewal monies and to provisions for costs payable in cash in the following financial year like bonuses and redundancies. Ordinarily it should stay relatively stable but we know in 2017 there was a fall induced by the lower season ticket prices and late renewals (which should have reversed this season) and believe this year there is a large accrual for the amounts payable to Arsène and his coaching team (£17m). A large chunk of deferred income (£34m) is recorded as relating to the period after May 2019 and we can only speculate that some advance payments may have been received this season from Emirates and Adidas in relation to the new sponsorship contracts that commence in season 2019-20. Any advance payment should just be a favourable timing difference that at some stage will reverse as the sponsorship contract expires but this could be as long as five years' time in which case it would be nothing to worry about short-term. On balance, we think it likely £17m will flow out for the amounts payable to ex-staff, but otherwise can see no specific reason to believe the gains will reverse next season.

·         Payments for players acquired in the summer. At a headline level these are believed to have cost around £61m plus agents' fees due on the players contracts. Not all this amount will have been due straight away, and for the top signings we believe based on past experience it is fair to assume 50 per cent will not be due for at least another year. Accordingly, we have estimated £31m as being the maximum up-front outlay the club incurred.

So to summarise, we set out below our view of Arsenal's current cash position:

Cash  

£231m

Debt Service

£36m

Working capital                  

£50m

Net player payments due 2018-19

£0m

Tax and debt payments

£9m

One off factors

£17m

Spare Cash

£119m

Net spent - summer 2018

£31m

Residual Cash

£88m

Accordingly, we estimate around £88m remained spare at the end of the summer 2018 transfer window, although would like to emphasise there is at least a further £92m of net payments still due on players in 2019-20 and beyond.

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 £40m) and that would add to any unspent monies at the moment.

Future financial performance: AST estimate of Arsenal Holdings Plc full year accounts for the year ending 31 May 2019

With such a long period having past since the year end (eight 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 2018

Year to May 2019

Revenues:

Actual

AST estimate

Matchday

99

94

Broadcast

180

165

Commercial & Retail

107

117

Player loans

2

2

Football revenue

388

378

 

 

 

Property

15

-

Total revenue

403

378

 

 

 

Costs:

 

 

Football costs wages

240

230

Football costs other

88

85

Amortisation of squad

92

95

Depreciation

16

16

Property & loans

9

-

Total costs

445

426

 

 

 

Operating loss

(42)

(48)

Player sales and JV income share

121

-

Interest

(9)

(12)

Profit / (loss) before tax

70

(60)

 

 

 

Loss before player sales & property

(57)

(60)

 

Stadium revenues (matchday)

Compared to least season there will be no Emirates Cup, fewer home league cup games and a home FA Cup game to share revenue from. We estimate this will result in a £5m reduction in matchday revenues to £94m. There is added risk if Arsenal fail to reach the quarter-final stage of the Europa League.

Broadcast revenues

Arsenal earned the lion's share of the Europa League market prize pool for English teams last season (€29m) as Everton, the only other English club in the competition, performed poorly. This season they will have to share with Chelsea, and Chelsea as FA Cup winners get a larger share. With no improvement in Arsenal's league position anticipated we believe broadcast revenues could fall by £15m this season to £165m.

Commercial and Retail

The club should benefit from the new shirt sleeve sponsorship with Rwanda, reportedly worth £10m pa, which is the amount we have assumed commercial and retail income will rise by in 2018-19.

Property

We do not believe a sale of the last remaining property is likely this season so no revenues are expected from this.

Wages

In summer 2018 there were considerable changes in personnel that will impact on the wage bill.

Off-field, Arsène and a lot of the coaching staff were replaced and then Ivan Gazidis left the club in October. Ivan and Arsène probably earned more than their replacements are being paid but exactly how much is hard to determine.

On-field, Mertesacker, Cazorla and Wilshere left when their contracts expired; Perez and Ospina were sold; Chambers left on loan; Leno, Torreira, Sokratis, Guendouzi and Lichsteiner joined. On balance we think there will only be a modest increase in wages (driven largely by the full year effects of Ӧzil's bumper pay rise). However, at a headline level there will be a drop as last season's figures were inflated by the £17m provision for Arsène and the coaching team's termination payments. We estimate this drop in wages will be £10m to £230m.

Overall result

The overall result we anticipate is a loss of £60m compared to a profit of £70m in 2018. The absence of £120m of profits from player sales is the driving force.

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. However, the latest Deloitte Football Money League published in January 2019 and based on Europe's top clubs' revenue for the season ended May 2018 shows Arsenal are now on the verge of dropping out of the top ten clubs and are falling behind all our main English rivals (including Spurs).

Set out below is a table showing the revenues in Euros of the English 'big six' in 2017-18:

 

Revenue €m's

Europe-wide ranking

Manchester United

666

3

Manchester City

568

5

Liverpool

514

7

Chelsea

506

8

Arsenal

439

9

Tottenham

428

10

By way of further comparison, Bayern Munich sit fourth in the table on revenues of €629m and Juventus eleventh on €395m. Bayern have commercial revenues of €348m, Liverpool €170m and Arsenal €120m (similar to Spurs).

In 2019 there is a new increased level of Champions League distributions that, given our anticipation of a fall in Arsenal's revenues, is likely to see Tottenham overtake Arsenal in turnover. That is frankly shocking, and although the new commercial contracts should add €50m from 2019-20, Arsenal will still firmly be playing catch-up unless there is a return to the Champions League. This is why the Chairman's report emphasised such a return is the sole focus of everyone at the club.