Arsenal - Money Don't Matter 2 Night

Arsenal’s transfer strategy this summer has left the vast majority of their fans perplexed. While the seemingly interminable Luis Suarez saga has grabbed most of the attention, allied with the failure to secure Gonzalo Higuain when the deal appeared done and dusted, the stark reality is that Arsenal have not bought anybody yet, let alone the marquee signing that the supporters crave. Yes, they have acquired the services of French U20 international, Yaya Sanogo, but he arrived on a free transfer from Auxerre in the French second division..

At the same time, there have been many departures from the Emirates, including the likes of Gervinho, Mannone, Arshavin, Djourou, Coquelin, Santos and Chamakh plus a veritable plethora of youth team players. Although most of these individuals did not feature a great deal in the first team last year, leading to the unfortunate “deadwood” label, it’s still a fair amount of experience for the squad to lose with no replacements coming in.

In fairness, Arsenal’s excellent run in the latter stages of last season was pretty encouraging, though the final Champions League spot was only secured in a nerve-jangling final game of the season, when Arsenal beat Newcastle 1-0 away from home (to the apparent astonishment of Lord Sugar, who, quite brilliantly, imagined a non-existent equalising goal from the Toon Army).

"I wanna dance with Koscielny"

Although Arsenal performed creditably, the fact is that they never threatened a challenge in the major competitions and were dumped unceremoniously out of the domestic cups by lower league opposition. Therefore, the need to strengthen was obvious to all and sundry. A couple of injuries to key players would highlight the threadbare nature of the squad, which would then have to rely on youngsters, who may well be talented, but are untested in the heat of battle, pre-season friendlies not being the best indicator.

As INXS once said, it’s enough to mystify me, especially given the bullish comments from Ivan Gazidis in June. Ah, those heady days of (early) summer, when Arsenal’s chief executive boasted, “This year we are beginning to see something we have been planning for some time, which is the escalation in our financial firepower.” He continued, “We have a certain amount of money which we’ve held in reserve. We also have new revenue streams coming on board and all of these things mean we can do some things which would excite you.”

But specifically what could this mean? For example, could Arsenal now pay a £25 million transfer fees and wages of £200,000 for one world class player? Gazidis pulled no punches, “Of course we could do that. We could do more than that.”

And he’s not kidding. When you look at the club’s cash balances – there in black and white in the accounts for all to see – Arsenal’s spending capacity is evident.

As at the end of the 2011/12 season (the latest year when football clubs have published their accounts), Arsenal had an incredible £154 million of cash, which is significantly higher than any of their competitors with Manchester United the closest with £71 million (less than half the Gunners’ cash pile). An even more amazing statistic is that Arsenal have almost as much cash as the rest of the Premier League’s other 19 clubs combined (£181 million).

The story is little different on the continent, where Europe’s leading clubs also retain less cash than Arsenal, preferring to invest most of their available funds into the squad. As might be expected, the financially astute Bayern Munich had £95 million, while, perhaps more surprisingly, Real Madrid had almost as much with £94 million – though both these clubs still held around £60 million less than Arsenal. Barcelona had much less cash at £31 million, while clubs with smaller revenue generation, like Borussia Dortmund and Juventus, were barely in the black with £4 million and £1 million respectively.

Although the club has only really started beating its chest about its financial strength this year, it has been obvious for a while that the club could have spent big. As far as back as 2005, former chief executive Keith Edelman observed, “There are sufficient funds available to the manger for transfers”, before upping the ante a couple of years later, “We have got plenty of financial firepower to make the transfers Arsène wants to make. We had over £70 million of cash at the end of the year and if Arsène wants to spend that money, we will make it available.” Sound familiar?

Gazidis has been singing from the same song sheet as his predecessor ever since his arrival, claiming that “The resources are there. We’ve got a substantial amount of money that we can invest”, before his now infamous comment about the club keeping its “powder dry” for future player investment. Although he made this sound like some sort of grand plan from the club, its cunning appeared to be of the variety that would only have been recognisable to those who appreciated Baldrick’s schemes in Blackadder.

There has been a steady upward trend over the last few years in Arsenal’s cash balances, which have grown from £74 million in 2007 to £154 million in 2012. The figure of £123 million announced at the Interims in November 2012 was lower, but this merely reflects the seasonal nature of cash flows during the year, e.g. the May balance will always be high following the influx of money from season ticket renewals, while November is lower as annual expenses, notably wages, are paid. However, the rising trend can be seen by the fact that November 2012 figure was £8 million higher than the previous year.

However, this does highlight the fact that not all of Arsenal’s cash balance is available for transfers. It’s not quite that simple, due to many factors, including the need to pay those pesky expenses.

Of course, other money will also flow into the club during the season, such as TV distributions and merchandise sales, though not all of the reported revenue is necessarily converted into cash, e.g. all of the £55 million from Nike’s initial seven-year kit supply deal from 2004 to 2011 had been paid by July 2006 (to help with financing the construction of the Emirates Stadium).

The debt incurred for the new stadium continues to have an influence over Arsenal’s strategy. Although Gary Neville, amongst others, may believe that this is no longer an issue, it is clearly a factor with Arsenal’s gross debt standing at £253 million at the end of 2011/12, comprising long-term bonds that represent the “mortgage” on the stadium (£225 million) and the debentures held by supporters (£27 million). In fact, only Manchester United have a higher debt in the Premier League as a result of the Glazer family’s highly leveraged takeover.

Although this has come down significantly from the £411 million peak in 2008, it is still a heavy burden, requiring an annual payment of around £19 million, covering interest and repayment of the principal.

Despite the high interest charges, it is unlikely that Arsenal will pay off the outstanding debt early. The bonds mature between 2029 and 2031, but if the club were to repay them early, then they would have to pay off the present value of all the future cash flows, which is greater than the outstanding debt. In any case, the 2010 accounts clearly stated, “Further significant falls in debt are unlikely in the foreseeable future. The stadium finance bonds have a fixed repayment profile over the next 21 years and we currently expect to make repayments of debt in accordance with that profile.”

Importantly, as part of the bond agreements, Arsenal have to maintain a debt servicing reserve, which was £24 million in the Interims. In plain English, this portion of the cash balance is not available to spend on new players. Similarly, Arsenal also have to maintain a small reserve that is restricted to use for property development, but that is only £1 million.

Speaking of property development, Arsenal’s interims mentioned that they would be getting an additional £20 million of cash from Queensland Road, though this would be “receivable in instalments over a two year period.” There should also be more money from the two remaining “smaller projects” on Hornsey Road and Holloway Road, which could be worth another £20 million (estimate), depending on planning permission.

"We have a rather large German"

The amount of cash available is also influenced by outstanding transfer fees, though this is not a major issue for Arsenal at the moment: in the Interims Arsenal owed other clubs £31.6 million, but were in turn owed £31.4 million by other clubs, so this basically netted out.

In addition, the club has so-called contingent liabilities, where payments are made to a player’s former club based on certain conditions being met, e.g. number of first team appearances, trophies won, international caps, etc. These amounted to £7.8 million in the Interims, but are by no means certain to be paid – that’s why they are described as “contingent”.

Finally, at least in terms of transfer activity, we would have to add in the net funds from the last two windows, but again this is not a particularly large factor. This summer, Arsenal have raised around £10 million from the sales of Gervinho to Roma and Vito Mannone to Sunderland, but they paid out £8 million to Malaga in January for Nacho Monreal, producing a positive net impact of £2 million.

The new £150 million commercial deal with Emirates (shirt sponsorship and stadium naming rights) will have an impact, even though it does not commence until 2014, with talk of up to £30 million being frontloaded. Indeed, Gazidis explicitly stated, “We’ll have additional money this financial year, which will be available to invest in the summer.”

He added, “The deal is all about football, it’s all about giving us the resources to be able to invest in what we put on to the field for our fans.” To which, the response that comes to mind is “actions speak louder than words”.

Gazidis also said, “Our revenues will grow to put us into the top five revenue clubs in the world”, which was somewhat confusing, given that Arsenal have been fifth highest in the Deloitte Money League in four out of the last six years, ever since the move to the Emirates stadium. They were overtaken by Chelsea last season, mainly due to their fellow Londoners’ Champions League triumph, i.e. a direct result of success on the pitch.

In truth, Arsenal have benefited from higher revenues than the vast majority of other clubs for many years. Their £235 million turnover was the third highest in England in 2011/12 and is likely to rise to more than £300 million in two years time. The aforementioned Emirates sponsorship is more than £20 million higher than the current deal, as is the new Puma kit 2014 supply deal (widely reported, though not yet officially confirmed), while the astounding new Premier League 2013/14 TV deal should generate at least £30 million more for a top four club.

In addition, most transfers are funded by stage payments, so Arsenal would not necessarily need to find all the cash upfront – though other clubs, aware of the North Londoners’ resources, may insist on most being paid immediately. In that sense, Arsenal are victims of their own financial success.

Furthermore, Arsenal could always “speculate to accumulate” by taking on some additional short-term borrowing, which should be no problem, given the strength of the balance sheet and future cash flows. I’m not saying that this would be advisable (or even necessary), but it would be a possibility.

So, what is the magic figure Arsenal have as a transfer fund? Given all of the variables described above, it's safest to quote David Bowie, "It ain't easy", when trying to pin this down, but the oft-quoted £70 million is a reasonable estimate. If funds from property development and future commercial deals are also made available, then it could be as high as £100 million.

Arsenal have long been considered the poster child for financial success, consistently reporting large profits. Not only did they register the highest profit before tax (£37 million) in the Premier League in 2011/12, but they have also made an incredible £190 million of profits in the last five years. In fact, the last time that the club made a loss was a decade ago in 2002. This is virtually unparalleled in the cutthroat world of professional football.

However, the headline figures do not tell the whole story, as much of this excellent performance has been down to profits from player sales (e.g. £65 million in 2011/12) and property development (e.g. £13 million in 2010/11). Excluding those once-off factors would mean that Arsenal actually made losses in the last two years: £4 million in 2010/11 and an apparently worrying £31 million in 2011/12.

In fact, the operating profit from the football business has been steadily declining since 2009 with the club actually reporting an operating loss of £16 million last season.

So that explains Arsenal’s reluctance to splash the cash?

Not so fast, big boy, there’s another layer of complexity to add here, as the accounting profit includes non-cash items, such as player amortisation, depreciation and impairment of player values. Without wishing to get overly technical, we need to add these back to the operating profit and then make an adjustment for working capital movements to get the cash profit.

Once we do that, Arsenal’s cash flow from operating activities was an impressive £28 million in 2011/12, a figure that was only bettered by two clubs in the Premier League. The problem is that Arsenal have spent very little of this on improving their squad: that season the net expenditure on player purchases was just £2 million – with only four clubs spending less than the Gunners.

Most of the available funds instead went towards financing the Emirates Stadium: £13 interest and £6 million on debt repayments. A further £9 million was invested in fixed assets for enhancements to Club Level, more “Arsenalisation” of the stadium and new medical facilities and pitches at the London Colney training ground.

Since 2007 Arsenal have generated a very healthy £376 million operating cash flow. Although they had a small negative cash flow of £7 million in 2011/12, this followed many years of positive cash flow, e.g. 2010/11 £33 million, 2009/10 £28 million, 2008/09 £6 million, 2007/08 £19 million and 2006/07 £38 million.

However, it’s instructive how Arsenal have used this spare cash. They have spent £71 million on capital expenditure, £110 million on loan interest and £64 million on net debt repayments. Astonishingly, only 1% (one per cent) of the available cash flow has been spent in the transfer market. Although Arsenal have laid out a fair bit of cash on buying players in the last couple of seasons (over £100 million), this has been more than compensated by big money sales, leaving a negative net spend.

The other notable “use” of cash in that period is, er, nothing, as cash balances have risen by £118 million.

That begs the rather obvious question: why not spend the cash? There’s no one magic answer to this, but let’s take a look at the usual arguments:

(a) Impact of new signings on the wage bill

One point that people often raise when discussing the transfer fund is that it would also have to fund a new signing’s wages, so if the club bought a player for £25 million on a five-year contract at £100,000 a week, that would represent a commitment of £50 million. That is undoubtedly true, but it is a little disingenuous, as it ignores the fact that this could be at least partially offset by the departure of existing players. This is particularly true this summer, when Arsenal have offloaded so many players.

There is no doubt that the rising wage bill has been a cause for concern at Arsenal. Since 2009 wages have grown by 38% to £143 million, while revenue has only increased by 5% in the same period – though this is where the commercial department could be justifiably criticised for their failure to add secondary sponsors. The wage bill will have increased again in 2012/13 following revised contracts for the “Brit Pack” (Wilshere, Walcott, Gibbs, Oxlade-Chamberlain, Ramsey and Jenkinson) to over £150 million.

On the other hand, there will be plenty of room going forward, as the growth in revenue to £300 million implies a sustainable wage bill of £180 million (representing a safe 60% wages to turnover ratio). To place that into context, Chelsea’s current wage bill is £176 million, while Manchester United’s is £162 million, leaving only Manchester City out of sight at £202 million.

However, these clubs might be impacted by the new Premier League regulations, which have restricted the amount of money clubs can spend from the new TV deal on wages. Specifically, clubs whose total wage bill is more than £52 million will only be allowed to increase their wages by £4 million per season for the next three years. However this restriction only applies to the income from TV money, so Arsenal’s additional money from the new sponsorship deals can still be spent on wages.

(b) Cover a potential failure to qualify for the Champions League

Many have speculated that Arsenal may be holding cash back as a “rainy day” fund to cover a revenue shortfall from any failure to qualify for the Champions League. This has been a lucrative source of funds for Arsenal, who earned €31 million in 2012/13 from the TV distribution alone, but Gazidis himself has quashed this theory many times, most recently in June, “The Champions League qualifier in August won’t affect our plans. It’s never been an issue when we’ve discussed with players before and it doesn’t affect our planning.”

(c) Players not available

One of the most fundamental laws of economics is the one relating to supply and demand and that is relevant here. In other words, it does not matter if you have money, if there aren’t any quality players to buy. Gazidis referred to this in his June interview, “It doesn't only require our decision, it requires the player’s decision and other clubs' decisions, so there is a market that has to move not just dependant on one party, but dependant on a number of parties and many of those parties have been in a period of uncertainty.”

That’s perfectly valid, but has not prevented other clubs doing business, e.g. Manchester City have already bought Stevan Jovetic, Fernandinho, Jesus Navas and Alvaro Negredo, while Spurs have acquired Paulinho, Roberto Soldado and Nacer Chadli.

Less justifiable was Wenger’s complaint that “Some clubs acted very early so the choices were reduced”, as if the transfer window were some kind of handicap race and those clubs had been given a head start.

"Cavani - the price is not right"

(d) Valuations are too high

Nobody wants to over-pay, but this is where Arsenal’s cash-rich position should work to their advantage. There’s no point in having more money than most other clubs if you don’t make it work for you. As an analogy, Arsenal may not have quite enough funds to buy in Harrods, but they could comfortably afford to shop in Waitrose, instead of wasting time haggling in Aldi.

Some have argued that Gazidis did Arsenal no favours with his “loadsamoney” speech, but, while this might have weakened the club’s negotiating stance, it is difficult to believe that executives at other clubs were not already aware of the Gunners’ financial position.

"Olivier's Army"

(e) Other clubs willing to spend more

Even if Arsenal are well positioned, some clubs still have more cash to spend. As Gazidis said, “I can’t compete with somebody who has an unlimited budget.” This echoed the thoughts of former chairman Peter Hill-Wood, who lamented, “At a certain level, we can’t compete.”

Fair enough, that’s certainly true, especially with the arrival of Paris Saint-Germain and Monaco on the scene – “more competition coming from France”, as Wenger drily observed. However, that still does not explain why the likes of Manchester United, Liverpool and Tottenham have outspent Arsenal in recent years.

(f) Implications for Financial Fair Play

Under FFFP, UEFA will look at aggregate losses, initially over two years for the first monitoring period in 2013/14 and then over three years, so Arsenal’s recent record of large profits would hold them in good stead, even if they were to temporarily slip into losses before the new revenue streams came on board. In addition, certain costs such as depreciation on fixed assets, stadium investment and youth development can be excluded from the break-even calculation, so this should not be a problem.

In fact, Arsenal hope that UEFA’s FFP regulations will reward their prudent approach, as these aim to force clubs to live within their means, thus restricting the ability of benefactor-funded clubs to spend big on players. Indeed, Gazidis stated that the advent of FFP meant that “football is moving powerfully in our direction.”

"You make me feel (mighty Monreal)"

(g) Lack of a proper transfer structure

As Monaco’s former chief executive, Tor-Kristian Karlsen, noted, when commenting on Manchester City and Tottenham’s transfer activity this summer: “I for one doubt it's a coincidence that the only two teams in the Premier League with genuine sporting directors (or technical directors or directors of football, if you like) are the ones who have appeared the most prepared, structured and with clear strategies in their work in the summer transfer market.”

If there is a modern, coherent transfer structure in place at Arsenal, then it seems remarkably well hidden. There may well be a great deal of activity behind the scenes, but the results speak for themselves.

(h) Will be used to pay dividends to the owner

Although the club’s owner, Stan Kroenke, has no record of taking dividends from his numerous sports clubs, there is still suspicion among some sections of the support that his game plan for Arsenal includes this possibility. When Kroenke was asked at the 2012 Annual General Meeting whether he intended to take dividends out of Arsenal, his response was hardly unequivocal, as he merely said that it was a decision for the board.

He added, “I have never said in any meeting that money wasn't available” and “our goal is to win trophies”, but the feeling remains that he is content with the status quo of fourth place in the Premier League, while topping the unofficial table for cash balances.

"Kroenke - the sound of silence"

(i) Makes it easier to sell the club

Having such a high cash balance obviously strengthens the balance sheet, but the club would arguably fetch a bigger price if it were successful. Moreover, most investors in football teams do not appear to be greatly interested in a financial return. Kroenke himself has said, “The reason I am involved in sport is to win. It's what it's all about. Everything else is a footnote.”

Indeed, if we look at this purely from the financial perspective, there is also the opportunity cost of not investing, as this reduces the chance of success on the pitch. As the presentation of the bond prospectus in 2006 put it, “the move to the Emirates Stadium should increase revenues and the ability to sustain a better playing squad – a virtuous circle.”

Gazidis echoed these thoughts in the summer, “you need the financial platform in order to create the sporting success, but you need the sporting success in order to supply the financial platform as well.”

This is why the bond structure includes a Transfer Proceeds Account, which had the objective of ensuring a high quality playing squad. This states that 70% of net player sales proceeds must be reinvested in players, but (crucially) also “other football assets or prepayment of debt”.

Regardless of how that account has been used, Arsenal’s cautious approach has cost them money. The TV distribution in the Premier League is relatively egalitarian with each place only worth an additional £0.8 million, but there is a significant upside in the Champions League, best seen in the 2011/12 season when Arsenal received €28 million for reaching the last 16, while Chelsea earned €60m for winning the competition.

In addition, a relative lack of success on the pitch cannot have helped Arsenal’s commercial team when they have tried to secure new deals. We already know that the new shirt sponsorship deal contains a number of clauses relating to performance, e.g. if Arsenal were to fail to qualify for the Champions League, the £150 million headline figure (over five years) would be somewhat less.

"Gazidis - brave boys keep their promises"

The other logical result of Arsenal’s many years of reported profits is that they are one of the few Premier League clubs that pay corporation tax: £4.6 million last season (the highest in the league). From a community aspect, this is a noble thing, but it is money that could have helped fund a new striker.

This is not a question of whether Arsenal have under-performed or not. Most neutral observers would agree with Gazidis’ assertion that “We have outperformed our spend, in virtually any metric you can look at, consistently for the last 15 years.” You can agree with that opinion, while still being unhappy that the club has not made the best use of its resources.

Arsenal are by no means a poor side, as they have shown in some encouraging pre-season displays, including a win against Manchester City, but they will find it difficult to maintain any sort of title challenge without strengthening. Obviously, there is still time to make important signings before the transfer window closes, but that’s not really the point, as the season will be well underway before Jim White embarrasses himself on Sky Sports News, including two Champions League qualifiers and the North London derby.

"Oh, Mickey, you're so fine"

No Arsenal supporter in his right mind would want the club to “do a Leeds”, but they are a considerable distance from that nightmare scenario. Equally, nobody should expect the promised big spending to guarantee an end to the recent trophy drought, but it would give the club the best opportunity to compete for honours, especially at a time when their main rivals have all gone through various degrees of management upheaval: nothing ventured, nothing gained.

At the very least, it would provide some substance to Gazidis’ statements that Arsenal are “extraordinarily ambitious” and “ready to compete with any club in the world”. As the well-known Arsenal fan, Spike Lee, once said, it’s time to “Do the right thing.”

Arsenal's Finances - 21 Questions

Just a few months ago Arsenal were riding high, as they still had credible chances to win trophies in four competitions. However, a late defeat to unfancied Birmingham City in the Carling Cup final initiated an awful sequence of events. Elimination by Barcelona in the Champions League was maybe predictable, though hopes had been high after a scintillating victory in the first leg, but the collapse of form in the Premier League was less understandable.

The fans were not best pleased by the club’s decision to raise ticket prices by 6.5% after another disappointing end to a season, especially against the backdrop of a takeover by one of the world’s wealthiest individuals, Stan Kroenke. Their mood was not exactly improved when the club sold its best two players, Cesc Fàbregas and Samir Nasri, in the summer.

Although there were sound reasons for these departures (Fàbregas wanted to return to his home town team; Nasri was entering the final year of his contract), it still seemed to underline Arsenal’s diminishing status and reinforce the label of a selling club. As manager Arsène Wenger said a few weeks earlier, “Imagine the worst situation, that we lose Fàbregas and Nasri. You cannot convince people that you are ambitious after that.”

"Oh Mickey, you're so fine"

That was a bitter pill to swallow, but could have been sweetened by the arrival of world-class replacements. The rumour mill spoke of hefty bids for the likes of Eden Hazard, Yann M’Vila, Mario Götze, Juan Mata and Santi Cazorla, but the fans had to make do with the last minute arrival of lesser lights like Mikel Arteta, Yossi Benayoun, Per Mertesacker, André Santos and Park Chu-Young. All fine professionals, no doubt, but not really the players to take Arsenal to the next level. These purchases in the latter stages of the transfer window smacked of desperation, rather than any coherent strategy.

The early signs for the new Arsenal have not been promising, as the club has endured its worst start to a campaign for over 50 years. Although the club has done pretty well in the Champions League, drawing away to Borussia Dortmund and winning at home against Olympiacos, the performances have not displayed Arsenal’s customary assured passing style. In the Premier League, it has been even worse with four defeats in the first seven games, including a humiliating 8-2 thrashing by Manchester United, a scarcely believable 4-3 loss to Blackburn Rovers and, most painfully of all, a 2-1 reverse against Spurs in the North London derby.

Arsenal’s support has always found some comfort in their self-sustaining business model, as the performance off the pitch has been the envy of most other clubs. However, even here, matters appear to have taken a turn for the worse in the recently announced financial results for 2011 with revenue falling from £380 million to £256 million and profit before tax declining from £56 million to £15 million. Clearly, that’s still far from shabby, but if you consider the magnitude of Arsenal’s profits in the last three years (2008 - £37 million, 2009 - £46 million), it’s a fair old fall.

Of course, headline figures can be highly misleading, so, with apologies to 50 Cent, let’s take a closer look at the underlying factors behind the numbers with 21 questions.

1. Why did the profit fall by so much?

There are two segments in Arsenal’s business: property development’s profit before tax actually rose by £2 million from £11 million to £13 million, while football dramatically fell £43 million from £45 million to just £2 million. Interestingly, chief executive Ivan Gazidis’s report partly attributed lower profits to a “reduced level of exceptional gains… from our property business”, but, even though the revenue was much lower, the profit is definitely higher after the write-back of an £8 million impairment provision and a £4 million reduction in interest payable, as all property debt has been cleared.

The principal reason for the huge decrease in football profit is much lower profit on player sales, which fell from £38 million in 2010 (mainly the sales of Emmanuel Adebayor and Kolo Touré to Manchester City) to £6 million in 2011 (largely Eduardo to Shakhtar Donetsk). The big money sales of Fàbregas, Nasri, Gäel Clichy and Emmanuel Eboué were not included in the 2011 results, as they took place after the accounting close of 31 May.

However, operating profit has also fallen by £11 million from £20 million to £9 million, as revenue was essentially flat at £225 million, while the wage bill surged 12% from £111 million to £124 million. Although player amortisation was £3 million lower, due to the limited investment in new players, this was offset by £3 million of exceptional costs associated with the takeover of the club.

2. Is the football business still profitable?

Yes, but the latest profit of £2 million emphasises how reliant the business model has become on player sales. Excluding the £6 million profit from this activity in 2011 would result in a loss of £4 million, partly due to the annual interest payments of £14 million that the club has had to cover since the club moved to the Emirates stadium.

The graph above highlights how much lower the football profit would have been if Arsenal had not been so financially astute in the transfer market. For example, the thumping great £56 million profit last year included £11 million from property development and £38 million from player sales. Without these exceptional factors, the pure football profit was only £7 million.

It is true that Arsenal still generated a healthy cash operating profit of £46 million in 2011, albeit £11 million less than the previous year, but that excludes non cash flow expenses like player amortisation and depreciation, which have to be absorbed via asset payments.

3. So Arsenal’s profitability is no good?

Far from it. Chairman Peter Hill-Wood observed, “We have had a robust financial performance, reporting another profitable set of full year results” and that’s fair comment. In the highly demanding world of football, very few clubs actually make money, as can be seen by looking at last year’s results when only four teams in the Premier League were profitable: Arsenal way ahead of the rest at £56 million, Wolverhampton Wanderers £9 million, West Bromwich Albion £0.5 million and Birmingham City £0.1 million.

This is emphasised by the huge losses reported by Arsenal’s perennial challengers: Chelsea £70 million, Manchester United £80 million and new kids on the block Manchester City £121 million. In fairness to United, their loss include many exceptional expenses related to the restructuring of their loans and they have recently announced a £30 million profit before tax for 2011.

To underline the Gunners’ focus on financials, Arsenal’s 2011/12 profit should be sensational with the inclusion of this summer’s player sales.

"Robin Reliant"

4. Why did revenue fall so much?

Revenue dropped by £124 million from £380 million to £256 million, but football revenue actually slightly increased by £2 million from £223 million to £225 million, so the fall was entirely due to the expected slow-down in property development, which declined £126 million from £157 million to £30 million.

The Highbury Square business peaked last year with the sale of 362 apartments worth £134 million plus the disposal of the Queensland Road social housing element for £23 million. This year only 69 flats were sold, as the club “sought to achieve value rather than sell off the remaining flats at the fastest possible rate.”

"Unlucky, Theo"

5. So is the property business over?

Not quite, but it’s nearing the end. Only 16 of the original Highbury Square apartments remain to be sold, though 21 additional property units adjacent to that development will also be available from spring 2012.

Three months ago, the Queensland Road market residential element was sold to Barratt, though the revenue and costs associated with this development will only be recognised in the accounts when legal completion occurs. This is estimated to be in summer 2012, so would only be included in the 2012/13 results. No financial details of this sale have been released, but The News of the World estimated that it was worth £25 million to Arsenal.

Discussions are ongoing with Islington Council’s planning department relating to the two remaining property sites on Hornsey Road and Holloway Road.

Importantly, whatever the accounting treatment, these developments will generate a useful chunk of cash, which has been estimated at £40 million in total by the Arsenal Supporters’ Trust. When commenting on the most recent results, Ivan Gazidis specifically noted this factor, “Our property business is debt-free, so any new sales of property do accumulate cash, which is very positive for the future.”

6. What’s happened to the revenue growth?

There has been zero growth since 2009 in the football operation, where revenue has been at the same level for three years: 2009 £225 million, 2010 £223 million and 2011 £225 million.

The only revenue stream that has grown in this period is broadcasting as a result of centrally negotiated deals by the Premier League and UEFA (for the Champions League). Both of the other revenue categories have declined, most notably match day income from £100 million to £93 million. Although the much maligned commercial area rose £2 million last year to £46 million, this is incredibly still £2 million lower than the £48 million reported in 2009.

7. Are other clubs suffering from no revenue growth?

Back in 2005 Arsenal’s revenue of £115 million was the lowest of the traditional Big Four English clubs, £51 million behind Manchester United’s £166 million. The move to the Emirates stadium in 2006 helped drive Arsenal to second place in the English money league, a position they have held since then.

So far so good, but as we have seen, the wheels have come off in the last two years. Chelsea and Liverpool also experienced virtually no growth in 2010, though I would expect Chelsea’s revenue to increase following new sponsorship deals with Samsung and Adidas. Liverpool have also signed lucrative new deals with Standard Chartered and Warrior, though their figures will be hit by the failure to qualify for the Champions League.

The problem for Arsenal (and the other clubs) is that Manchester United’s revenue is still growing apace – from £286 million in 2010 to £331 million in 2011 on the back of significant commercial advances. Not only that, but the Spanish giants have also reported substantial gains in 2001: Real Madrid from £359 million to £417 million and Barcelona from £326 million to £392 million.

8. So is Arsenal’s revenue on the low side?

By no means. Last season Arsenal’s revenue was the fifth highest in Deloitte’s Money League, only behind Real Madrid, Barcelona, Manchester United and Bayern Munich, so they’re hardly on the poverty line.

The issue is that Arsenal are struggling to increase their revenue, while the others are powering ahead. This was explicitly acknowledged by Arsène Wenger, “Barca and Real Madrid have much more financial power than they had 14 years ago, because they have individualised their TV rights.”

That’s certainly true, but Arsenal have also fallen behind on commercial income, where they only stand 13th highest in Europe. Last season their revenue of £44 million in this category was dwarfed by Bayern Munich £142 million, Real Madrid £124 million, Barcelona £100 million and Manchester United £81 million.

Not only that, but the gap is getting wider. While Arsenal’s commercial revenue slightly increased to £46 million in 2011, other leading clubs have all reported substantial improvement. In particular, Manchester United became the first English club to top £100 million from this revenue stream. Their £103 million is now £57 million more than Arsenal. Put another way, that’s the equivalent of ten players on £100,000 a week. A similar level of sponsorship money would revolutionise Arsenal’s wage structure.

9. Why is commercial revenue so low?

Arsenal’s weakness in this area arises from the fact they had to tie themselves into long-term deals to provide security for the stadium financing, which arguably made sense at the time, but recent deals by other clubs have highlighted the lost opportunities. The Emirates deal was worth £90 million, covering 15 years of stadium naming rights (£42 million) running until 2020/21 and 8 years of shirt sponsorship (£48 million) until 2014. Similarly, the club signed a 7-year kit supplier deal with Nike for £55 million until 2012, but that has since been extended by 3 years until 2014.

So, following step-ups, the shirt sponsorship deal is reportedly worth £5.5 million a season, which compares highly unfavourably to the £20 million earned by Liverpool from Standard Chartered, Manchester United from Aon and (reportedly) Manchester City from Etihad. Even more galling is that Tottenham now earn £12.5 million a season from shirt sponsorship (Auresma £10 million plus Investec £2.5 million). It’s the same story on the continent with Barcelona’s first-ever shirt sponsorship deal with the Qatar Foundation worth £26 million.

The news is no better with Arsenal’s kit deal, which now delivers £8 million a season, compared to the £25 million deal recently announced by Liverpool with Warrior Sports and the £25.4 million paid to Manchester United by Nike.

It’s not overly dramatic to say that Arsenal leave at least £30 million a season on the table, because of these historical commercial deals, which would fund the purchase of one great player every season. One of the club’s biggest challenges is how to bridge this gap until 2014, when these deals are up for renewal.

10. What is the club doing about commercial revenue?

New owner Stan Kroenke has said that he “intends to use his experience to help Arsenal continue to grow its global brand”, pledging that they “will be able to do as well as Manchester United.” Quite frankly, that seems a long way off, as United continue to raise the bar, most spectacularly the amazing DHL deal to sponsor training kit for £10 million a season, which exceeds the value of all but four of the main shirt sponsorship deals in the Premier League.

Arsenal have restructured their executive team at great expense, recruiting Tom Fox from the NBA in August 2009 as Commercial Director to “drive long-term commercial success.” However, the proof of the pudding is in the eating and so far there has been a lot of talk about “jam tomorrow”, as opposed to tangible revenue growth.

To be fair, it’s relatively early days in the club’s five-year plan and there are some signs of progress. In particular, a few secondary sponsors have been signed up recently, including Carlsberg at around £3 million a year and Indesit in a “multi-million” deal. In addition, Citroen extended their deal for a higher sum, while there were new agreements with Thomas Cook, replacing Thompson Sport, and on-line gambling firm Betsson. However, Arsenal still have less than half the number of sponsors that partner with Manchester United.

Arsenal’s tour to Malaysia and China was their first long-distance pre-season tour in 12 years and should help grow the club’s global fan base in this valuable market, potentially boosted by the signing of South Korea captain Park Chu-Young. The Guardian reported that the tour would generate £15 million, which seems on the high side, but there’s little doubt that this was a positive financial move, although may not have been ideal in terms of fitness conditioning.

Other improvements are less visible, but may deliver in the future, such as refurbishing the club premium areas and, most intriguingly, signing a multimedia distribution agreement with MP & Silva.

11. What happens if the club fails to qualify for the Champions League?

Arsenal have managed to qualify for the Champions League a remarkable 14 years in succession, though this season the side had to demonstrated impressive resilience to get through a tricky qualifying tie against Udinese. In other words, they have become accustomed to a regular infusion of substantial funds from playing in Europe.

Last season Arsenal received €30 million (£26 million) for reaching the last 16 in the Champions League, which was €3 million less than the previous year, when they progressed a round further. Even if they did not make it out of the group, they would still receive around £25 million, but the prize for doing better is considerable, e.g. last year’s finalists Barcelona and Manchester United received £44 million and £46 million respectively.

Those are just the television distributions, but there are also be additional gate receipts and bonus clauses in various sponsorship deals, increasing the amount of money at stake. In total, we’re probably looking at a £35-45 million potential revenue reduction.

The Europa League's TV distribution is very low in comparison. Last season, the two English representatives, Manchester City and Liverpool, each earned just €6 million for reaching the last 16, while the highest pay-out was only €9 million. However, at least this tournament would still deliver significant gate receipts. As the season ticket includes seven cup games, the price of the ticket would surely have to come down without Europe, so qualification for the Europa League is still worthwhile from that perspective.

In the past, Gazidis has claimed that Arsenal budget so that the club could survive missing a year of Champions League football without selling players, but there’s no doubting the importance of qualification, not least in terms of attracting the right calibre of player to the club, though Liverpool have managed to secure the services of the likes of Luis Suarez, despite being absent from Europe’s flagship competition.

12. What are the implications of slipping down the Premier League?

Even though Arsenal dropped a place to fourth in 2010/11, the Premier League distribution increased £5 million to £56 million, almost entirely due to the substantial increase in overseas rights for the new three-year deal that commenced last season. Excluding overall contract changes, there’s actually not an enormous difference between finishing third and fourth, due to the equitable nature of the distribution methodology.

Each club gets an equal share of 50% of the domestic rights (£13.8 million) and 100% of the overseas rights (£17.9 million). However, facility fees (25% of domestic rights) depend on how many times each club is broadcast live, and this was worth £11.6 million. Finally, merit payments (25% of domestic rights) are worth £757,000 per place in the league table. For example, if Arsenal were to drop, say, four places to eighth that would equate to a £3 million decrease in revenue.

13. Could they have avoided raising ticket prices?

The short answer is, of course they could, as nobody put a gun against their head, especially given that Arsenal enjoy the third highest match day income in the world, only behind Manchester United and Real Madrid. This fell slightly in 2011 from £93.9 million to £93.1 million, even though there was one more home match, as the mix was not so favourable, due to two fewer games in the Champions League. Arsenal’s season ticket prices are already among the highest in the world, though comparisons are difficult, as they include seven cup games.

Arsène Wenger made the reasonable point that the 6.5% price rise was necessary in order “to increase our income to fight with the other clubs”, but there would have been other ways of making a similar sum. For example, a bit more success on the pitch would have generated additional funds, either via a higher Premier League place (second was there for the taking) or more victories in the Champions League (remember Shakhtar Donetsk and Braga away?). Or how about one of the board directors that coined it after the sale of their shares to Kroenke paying the £3 million takeover costs borne by the club?

As the old saying goes, where there’s a will, there’s a way. Unfortunately, the club’s stance was explained by Tom Fox in an interview with an American magazine. After seeing the 40,000 waiting list for season tickets, he said “As a US sports executive… you think, you’re not charging enough for tickets.” In the business world, price increases are often considered the path of least resistance, and football club owners are proving increasingly happy to adopt the same approach, as their “customers” have the fiercest brand loyalty around. After all, an Arsenal fan is hardly likely to switch his allegiance to Spurs.

14. Will the crowd levels hold up?

Arsenal’s average attendance of 60,000 is the second highest in England, only surpassed by Manchester United’s 75,000. In fact, it is the seventh best in Europe. All good, but this level of support should not be taken for granted. Not only is the team less successful, but the quality of football at the Emirates has faded, leading to a less attractive “product” (to use a marketing term). In addition, the effects of the economic crisis mean that some fans will simply be unable to afford to follow Arsenal, a fact acknowledged by Wenger, “The stadiums will be less quickly full and we have noticed that already.”

15. Is it true that Arsenal have spent much less than other clubs on transfers?

Absolutely true. In fact, Arsenal are the only leading club to make money from buying and selling players in the era of foreign ownership (starting from the arrival of Roman Abramovich at Chelsea). Since 2003/04, Arsenal have net proceeds of £21 million, while Chelsea and Manchester City have spent well over £400 million. In the same period, Liverpool, Tottenham and Manchester United have all spent around £100 million.

Billy Beane, one of the pioneers of the Moneyball approach to buying under-valued players, is a big fan of Wenger’s approach, “When I think of Wenger, I think of Warren Buffett. He runs his football club like he is going to own it for 100 years.” Stan Kroenke clearly shares his view, praising Wenger for “his ability to spend money and extract value.”

This is all well and good, but in a time when other leading clubs are generously funded by benefactor owners, some compromise might be in order. Indeed, Gazidis promised a busy summer and Arsenal splashed out £53 million on new players. Of course, they still ended up with net sales proceeds of £18 million, as players leaving brought in £71 million. If decent offers had come in for the likes of Nicklas Bendtner, Manuel Almunia, Sébastien Squillaci and Denilson, this sum may well have been even higher.

"Jackie Wilshere said"

16. How much is available to spend on transfers?

Before the summer transfer window, Ivan Gazidis said that Arsenal had a substantial transfer budget, “Financially, we're in a strong position. We have resources to spend. We're certainly not sitting there saying 'Let's hold back on our resources for some reason.' Why would we? The resources are there.” My own estimate was that the club had £35 million available excluding any surplus cash from property development. Everything else being equal, as we have seen, the summer’s activity should have produced another £18 million, which would theoretically mean a transfer budget of £53 million.

Some fans look at the club’s cash balances of £160 million, up from £128 million a year ago, and think that more money must be available, but the club has to maintain a debt service reserve for the stadium financing and also has to consider the seasonal nature of cash flows, e.g. money taken from season ticket renewals at the beginning of summer will be used to pay expenses over the next few months.

Nevertheless, it is clear that a sizeable war chest is still there, as Gazidis recently confirmed, “We deliberately kept some powder dry… There are funds available to invest in a significant way in January and next summer.” Whether the club does so is another matter, though any expenditure in January might pay for itself if it makes the difference between qualifying for the Champions League or not.

17. But what about the wages?

While Arsenal could almost certainly afford to pay transfer fees for new players, there remains the question of whether they could also afford to pay the wages. On the face of it, this should not be a problem, as Arsenal’s wage bill of £124 million is one of the highest in England. Although it is £29 million lower than Manchester United’s £153 million, that was inflated by performance-related bonus payments, so the real difference is much lower.

That said, Arsenal’s wage bill in 2010 of £111 million was overtaken by both Manchester City £133 million and Liverpool £114 million, plus it was considerably lower than Chelsea’s £173 million, though that should reduce following the departure of a number of senior players.

The pressure to compete is obvious by the deterioration in Arsenal’s wage to turnover ratio from 46% in 2009 to 55% in 2011. Although this is still one of the best in the Premier League, it is the logical result of flat revenue and 20% growth in wages (12% last season alone).

Given the magnitude of Arsenal’s wage bill, it seems strange that they do not pay top dollar to their star players, but this is due to a couple of factors. First of all, Arsenal have a very large squad with a vast number of “young professionals”, but more importantly they operate an equitable wage structure, which means that the best players are not particularly well remunerated (by modern standards), while fringe players like Abou Diaby, Thomas Rosicky and Marouane Chamakh are handsomely rewarded for their efforts. Not only does this reduce the money available to attract world class players, but it also makes it difficult to move on under-performers, hence loans for Bendtner and Denilson.

This approach needs a root and branch review, as it cannot be adjusted for an individual player or others will soon demand equivalent pay rises. This is a concern with some key players entering the final year of their contracts like Robin Van Persie, Thomas Vermaelen and Theo Walcott. Van Persie has already complained that Arsenal will not pay “enormous amounts of money”, hinting that this encourages a player’s decision to “go elsewhere.” This issue was tacitly confirmed by Wenger, “I cannot today say that if we go to the maximum we are sure to sign a player.”

18. Can the club pay off its debt?

Following the elimination of the property debt, the club has managed to reduce its gross debt to £258 million, leaving just the long-term bonds that represent the “mortgage” on the Emirates Stadium (£231 million) and the debentures held by supporters (£27 million). Once cash balances of £160 million are deducted, net debt is down to only £98 million, which is a significant reduction from the £136 million last year and the £318 million peak in 2008.

It’s not clear whether it would be possible for Arsenal to pay off the outstanding debt early in order to reduce the interest charges, but my guess is that they are in no hurry to do so, as Gazidis has previously argued that not all debt is bad, “The debt that we’re left with is what I would call ‘healthy debt’ – it’s long term, low rates and very affordable for the club.” In any case, the 2010 accounts clearly stated, “Further significant falls in debt are unlikely in the foreseeable future. The stadium finance bonds have a fixed repayment profile over the next 21 years and we currently expect to make repayments of debt in accordance with that profile.”

"No doubting Thomas"

19. Will UEFA’s Financial Fair Play help Arsenal?

Many fans believe that the FFP regulations will benefit Arsenal, as they force clubs to live within their means if they wish to compete in Europe. The theory was that this would lead to the demise of the big spending, benefactor model, while encouraging those teams who adopted a self-sustaining approach. Clearly, Arsenal will have no problem complying with the new rules, but other leading clubs are maybe not so badly placed as once feared.

Real Madrid and Bayern Munich have been consistently profitable, thanks to their huge revenue, while Barcelona have also reported regular profits except when there is a change in club president. Even Manchester United now make profits despite their ample interest payments.

Clearly, FFP will be more of a challenge for clubs like Manchester City and Chelsea, who make huge losses, but UEFA have made it easier for such clubs to conform. First, UEFA’s break-even calculation is not exactly the same as a club’s statutory accounts, as it excludes certain expenses, including depreciation on tangible fixed assets and expenditure on youth development and community development activities.

"Most ox-cellent"

Second, wealthy owners will be allowed to absorb aggregate losses (so-called “acceptable deviations”) of €45 million (£39 million), initially over two years and then over a three-year monitoring period, as long as they are willing to cover the deficit by making equity contributions.

If that wasn’t enough, clubs will be allowed to exclude wages from players signed before June 2010, so long as they are reporting an improving trend in their accounts. Granted, that “loophole” only exists for the first two monitoring periods (2013/14 and 2014/15), but it will buy the clubs time to improve their finances.

Finally, there has to be a concern that accountants and lawyers will look to bend the rules. Wenger accused Manchester City of doing just this with their £400 million Etihad deal, “They give us the message that they can get around it by doing what they want. It means financial fair play will not come in.”

In short, FFP may not prove to be the cavalry coming over the hill that some imagined for Arsenal. If it is, then it will be a good few years before it bites.

"Rambo - first touch"

20. What are Stan Kroenke’s plans?

All indications point to Kroenke being an owner that prefers not to interfere with those running the club, which he confirmed in a recent interview with the Daily Telegraph, “The idea is to put good people in place and trust them to do their jobs.” In fact, he has said that Arsène Wenger can remain at Arsenal for as long as he likes. However, you would have to think that he would take steps to protect his investment if it looked like Arsenal were struggling financially.

Although he is unlikely to push for a massive spending spree (“There’s a risk of going backwards if you over-react and start throwing money around in an attempt to solve your problems”), he is not afraid to spend, e.g. his Denver teams are among the top spenders in the NBA and NHL, while the St Louis Rams have spent the maximum allowed under the NFL salary cap rules.

He is a long-term investor who has never sold a share in one of his sporting clubs, but if he did want an exit route at Arsenal, then Alisher Usmanov, who holds just over 29% of the club’s shares, would happily provide it. He has offered £14,000 a share, which is considerably higher than the £11,750 that Kroenke paid to take his stake to around 67%. That seems unlikely, given Kroenke’s excitement about the potential at Arsenal, not least the global opportunities offered by broadcasting the Premier League.

"Pole apart"

21. What could Arsenal do to improve their finances?

Bearing in mind Peter Hill-Wood’s assertion that “strong financial performance is not an end in itself, but creates the platform from which the club can build and sustain the on-field success which is always the main objective”, there are a few actions that Arsenal could take:

a. Renegotiate the main sponsorship deals. Although these are only due for renewal in 2014, there must be some mileage in trying to negotiate an increase now in return for guaranteed renewal. Obviously, Arsenal’s ability to maximise value would be stronger if the team is winning trophies.

b. Review the wages structure to make it easier to attract world-class stars.

c. Offload under-achieving players, even if they are sold cheaply or given away, in order to have some room to manoeuvre in the wage bill.

d. Buy quality in January. This could boost the team’s performance in the second half of the season, as happened with Liverpool last season, and ensure that the likes of Van Persie don’t jump ship.

e. Rebuild the famous scouting network. It seems like ages since they beat other clubs to the best talent worldwide.

"Don't look Bac in anger"

f. Kroenke could loan the club funds to fill the hole until the commercial machine starts buzzing. He might even pay off the outstanding debt to remove the interest burden.

g. Consider a rights issue. Although an expensive (and unlikely) option, this would also raise money and might even extend the fans’ ownership scheme.

h. Inject some new blood onto the board. Former director Lady Nina Bracewell-Smith suggested that the current directors should be replaced by a more “dynamic, pro-active, younger board”, while Usmanov accused the board of lacking ambition.

i. Review the training and medical practices. Arsenal’s lengthy injury list, including crucial players like jack Wilshere and Thomas Vermaelen, has severely damaged their prospects for a few seasons. There surely must be more to it than simple misfortune.

Obviously, it’s not all doom and gloom at Arsenal. They have a fabulous stadium, a renowned academy, a great manager and a few top quality players. However, it does feel as if the club is at a crossroads and the decisions they take over the next few months could be very important for Arsenal’s future, both on and off the pitch.