Are Liverpool A Good Investment?

So Liverpool FC is up for sale – not just the minority stake that the club’s reviled owners, Tom Hicks and George Gillett, had placed on the market many months ago, but the whole damn thing. Liverpool’s bankers have finally run out of patience with the unpopular duo and brought in a new chairman, Martin Broughton from British Airways, with the explicit task of securing a buyer and getting a deal done. The banks may have extended the repayment date on the club’s loans, but they have made it crystal clear that they want their money back.

Displaying the customary self-assurance of Liverpool’s senior executives, Broughton confidently talked about “completing a sale within a relatively short period – a matter of months.” However, the fans have learned not to believe every statement uttered by the management hierarchy, most notably being disappointed by Rafa Benitez’s failure to deliver the fourth place in the Premier League that he had foolishly guaranteed. Specifically on the investment issue, managing director Christian Purslow’s promises to obtain £100m additional financing first by the turn of the year, then Easter, also proved to be of the empty variety.

Consequently, if we want to know whether Liverpool would be a good investment, we need to stop listening to those who have a vested interest in making the sale. Instead, let’s take a look at the accounts for a truly unbiased view of the club’s financial situation. Fortunately for us, last week the club published a new set of accounts for its parent company, Kop Football (Holdings) Limited. Ideally, these would be more up-to-date, as these results only cover the twelve months up to 31 July 2009. In fact, that’s the first thing to note about these results: they’re issued late (almost a fully year after the accounting period finished), which is rarely a good sign. In fact, it’s normally an indicator of bad news.

Sure enough, the headline figure is a thumping great loss before tax of £54.9m, which is 34% worse than last year’s significant loss of £40.9m. That’s a cumulative loss of £95.8m for the last two years’ results, which would give any prospective buyer pause for thought, especially as this year’s deterioration came after a successful season in which Liverpool’s revenue was enhanced by finishing second in the Premier League and reaching the quarter-finals of the Champions League, and was also boosted by a lucrative pre-season tour of the Far East. It does not take a genius to realise that the 2010 turnover will be adversely impacted by this season’s poor results (seventh in the Premier League, not making it out of their group in the Champions League), while the 2011 revenue will be even lower, as Liverpool have not even qualified for next season’s Champions League.

You don’t have to look too far for the main reason for the record loss: almost all of it is down to the huge interest payments on the loans that the Americans took out to buy the club, which has gone up 10% from £36.5m to £40.1m. Before the current ownership regime arrived, Liverpool never paid more than £3m interest in a year, as they had no need of substantial bank loans, but they have now had to shell out a total of £85.3m in interest since the takeover in February 2007. That is money that could have been used to strengthen the squad or go towards building a new stadium, instead of effectively going to the owners. It’s even more galling, when you see that this year’s increase in interest payable is due to further finance from Kop Football (Cayman) Limited, which happens to be owned by Hicks and Gillett. Financial analysts look at the interest coverage ratio, which shows how many times interest payable is covered by trading profit. Anything below 1.5x is regarded with suspicion, but Liverpool’s trading profit of £27.4m does not cover the £40.1m interest at all.

"Glad you find it funny"

Everyone knows that the club was saddled with a mountain of debt to fund the takeover, but the really bad news is that it is increasing. Net debt shot up £51.6m in the last twelve months from £299.8m to £351.8m. That is net of £26.9m of cash, so the gross debt is even higher at £378.6m, comprising £234m of bank loans (mainly with the Royal Bank of Scotland) and £144m owed to Cayman Limited. Interest on the bank loans is at LIBOR plus 5%, while the inter-company interest is accrued at a less reasonable 10% a year. This has not yet been paid, potentially casting the owners in a good light, until you realise that it is simply added to the growing debt. Earlier this year, managing director Christian Purslow said that the debt was down to £237m, but after looking at these accounts my guess is that he was referring only to the bank loans and not including the money owed to Hicks and Gillett via their offshore company. Some newspapers reported that the total debts were £472.5m, but this is over-stated, as it includes trade creditors, accruals and deferred income.

The Cayman Limited loan is repayable on demand, though the agreement states that this cannot be progressed if it would cause the company to become insolvent, which is “kind” of the owners. Of more concern is that less than half of the £297m credit facility with RBS (£110m) is secured by letters of credit and personal guarantees from the owners, leaving the remaining £187m to be secured by the club’s assets. Supporters might argue that Liverpool’s gross debt of £378.6m is only about half of Manchester United’s debt, but United generate nearly £100m more revenue and their debt is long-term, while Liverpool’s bank loans are extremely short-term in nature. The other English club with significant debt was Arsenal, but that was used to finance the construction of a cash generating new stadium, rapidly eating into the amount owed. Chelsea, of course, are in a different ball game, as their owner has simply converted the debt into equity.

"I'll get £100m by Christmas, no Easter, errm ..."

As the auditors so clearly expressed it, the club is “dependent upon short-term facility extensions”, or relying on the bank’s goodwill, which is a very uncomfortable position to be in. The current credit facility was due for repayment on 24 January 2010, but the club failed to make the £250m payment, so the bank extended the date (by just six weeks) to 3 March. Christian Purslow had previously implied that the repayment to RBS was only due in July, but it looks like the bank was not even willing to wait that long. However, it is believed that they have granted yet another extension, this time for six months, which would mean repayment in September. No wonder Broughton wants to complete the sale in just a few months.

Hicks and Gillett extending the credit facility is a habit that started last year, when RBS forced the owners to pay off £60m of their debt to the bank in return for a one year extension. In hindsight, the criticism of Dr. Rogan Taylor, director of the Football Industry Group at Liverpool University, was right on the money: “It is little more than an expensive fix – just sticking plaster, making things more difficult for the club to progress in the long run. It is still very short term, year to year, if that.” Although the directors claim that “active negotiations are in progress to secure new financing”, they acknowledge their difficulties in the annual report, “The current economic conditions have continued to have a significant impact upon world credit markets and accordingly raising finance in this environment remains challenging.” You can say that again.

Despite these financial constraints, the wage bill has still increased by 14% (£12.4m) from £90.4m to £102.9m, thus joining Chelsea, Manchester United and Arsenal as the only clubs in the Premier League with a payroll over £100m. All the same, the wages to turnover ratio is unchanged at 56%, thanks to the rise in turnover. This is not great, but is still pretty good, though it would look much worse if the club lost the revenue from the Champions League. Oh.

"What the hell's going on?"

Even though the wage bill has grown, the value of the players has actually fallen, at least on the balance sheet, with intangible assets decreasing by £34.7m to £194.8m. Of course, the players’ value in the transfer market would certainly be higher than their net book value, but the financial reality is that the club do not have many assets. In fact, according to the balance sheet, they have less than zero, as net liabilities have increased by more than £50m to £128.5m. This is despite fixed assets increasing by £20.8m, largely as a result of investment in the planning and design of the new stadium.

That means that the club has now managed to spend £45.5m on the proposed new stadium, which is some achievement, given that it is as far away as ever from being started, let alone finished. There’s still no sign of George Gillett’s famous shovel being in the ground. If the auditors decide that this stadium is unlikely to be built, these expenses will no longer be considered an asset, but will have to be written-off. The only other “asset” the club has are accumulated tax losses of £63m, which are available to offset against future profits.

Given these figures, it should be no great surprise that KPMG, the club’s auditors, repeated their warning of a year ago of a “material uncertainty which may cast significant doubt on their ability to continue as a going concern.” The fact that last year’s accounts contained the same admonition without the club going out of existence in the intervening twelve months would suggest that this is not necessarily a doomsday scenario, but it’s still a serious issue. A similar warning was included in Hull City’s last accounts, whereupon chairman Adam Pearson proclaimed, “the supporters should rest assured the club is in no danger of going out of business or going into administration”, but his tune changed a few months later, when he admitted, “nothing could be ruled out.” Hull’s problems were magnified by the significant fall in revenue following relegation from the Premier League. Potential investors in Liverpool might just ask themselves whether non-qualification for the Champions League would have a similar detrimental impact.

The really important issue for Liverpool is whether they have enough cash to pay their bills, not just in terms of their ability to service their debts, but also to pay their players’ wages and (most importantly) their tax bills. As we have seen on numerous occasions this season, HMRC have no hesitation taking football clubs to court to recover any monies owed. Liverpool are not quite there yet, but the cash flow statement does emphasise the basic flaws in their business model. At an operating level, the club generates healthy amounts of cash (£38m in 2009), but it then needs to use all of that and more on paying interest (£29m) and capital expenditure (£51m). This leaves it with a net cash outflow of £42m, which would be even worse if the club had paid the £8m interest owed to Cayman Limited. This shortfall needs to be shored up by additional financing of £49m, which obviously leads to the debt growing even more. It’s a vicious circle.

Anybody thinking of making an investment in a company would also consider the quality of the management, though they should be mindful of one of Warren Buffett’s sagacious quotes, “When a management with a reputation for brilliance tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact.” Nevertheless, it’s worth taking a look at how Liverpool’s management are doing.

One of the key elements in the club’s stated strategy is to strengthen the football squad. Even though manager Rafa Benitez has frequently complained about not being given sufficient resources to compete, his much-loved facts do not appear to support this view. Since his arrival in the summer of 2004, the club has backed him to the tune of spending £249m on bringing players to the club. To be fair, Benitez has recovered £141m from player sales, but that still leaves a net spend of £109m, second only to the big spenders at Manchester City (£228m) and Chelsea (£145m). However, it is considerably more than Manchester United (£32m) and Arsenal, who actually have a transfer surplus of £26m over the same period. Given that all this transfer activity has only resulted in a mediocre seventh place in the Premier League, I would argue that this strategic objective has not been achieved.

The significant spend on new players is reflected in very high amortisation of £45.9m. The accounting treatment here is to write-off the costs associated with buying players over the length of their contracts, based on the (conservative) assumption that a player has no value after his contract expires, since he can then leave on a “free”. To place this into context, this is higher than amortisation costs at Arsenal £23.9m and Manchester United £37.6m, while it is only a little lower than Chelsea £49m.

"Give me more money - or I'm off"

The other component of players’ costs are wages, which is normally a very strong indicator of how well a team is likely to perform on the pitch. For example, this season the first three places in the Premier League were filled by the teams that respectively had the highest wage bill (Chelsea), second highest (Manchester United) and third highest (Arsenal). The only team to buck that trend was Liverpool, who finished seventh, despite having the fourth highest wage bill. To sum up, Benitez has been given an awful lot of money to spend on both transfers and wages, but the statistics indicate that he has under-performed.

But Liverpool are in a Catch-22 situation with Benitez, as the feeling is that the club would prefer him to leave, but that would endanger any stability the club might have. At a time when the manager should be planning for the forthcoming season, there is substantial uncertainty over his position. Some argue that this is due to the size of any potential severance payment, but the latest accounts show that the club is willing to do that if push comes to shove, paying out £4.3m to the former chief executive and academy coaching staff. This reputedly included £3m to Rick Parry, even though he was labeled a “disaster” by Hicks.

And yet, there is some good news in the accounts if you look beyond the headline figures. Most impressively, the club is profitable at an operating level (excluding player trading, interest, tax and amortisation), making £27.4m, which was actually £2.4m (10%) up on last year. This would have been even higher without the £4.3m exceptional severance payment.

"Can you hear the drums, Fernando?"

Benitez has also delivered a £3.4m profit on player sales (Arbeloa, Leto) following a £14.3m profit in 2008 (Crouch, Sissoko, Carson, Riise, Guthrie). A further £13.4m profit was made on sales after the accounting year-end closed (Alonso, Dossena, Voronin). Of course, this is a bit of a double-edged sword, as such good business will keep the banks happy, but no fan likes to see the team’s best players leave. For example, most would agree that Xabi Alonso has not been adequately replaced.

From a financial perspective, you could argue that the £14m increased loss before tax has been largely caused by the £11m reduction in profits from, player sales. In fact, if Alonso had been sold to Real Madrid just a week earlier, the loss would have been smaller than the previous year.

The other encouraging aspect in the accounts was the 14% (£23m) increase in turnover from £161.8m to £184.8m. There was good growth in all categories with broadcasting income rising £6.4m to £74.6m, reflecting the successful season. The £3.3m increase in match day income was particularly impressive, given that there were three fewer home games in 2008/09, but the star of the show was commercial revenue, which soared 25% (£13.5m) to £67.7m, thanks to four new partnerships. Only a curmudgeon would note that this revenue growth was all but wiped out by the £21m cost growth.

Enough about the past, is there anything Liverpool can do to make themselves more attractive financially? Well, they could try to build on last year’s growth and further increase revenue. The new commercial team have obviously not been sitting on their hands, as they have already secured some future growth, notably the new shirt sponsorship deal with Standard Chartered bank that commenced after these accounts. This is worth up to £20m a year, which would be a £12.5m uplift on the old deal with Carlsberg, though apparently a significant element depends on the team’s performance. Liverpool’s commercial revenue of £67.7m is already worthy of praise, only just behind the marketing machine that is Manchester United (£70m) and a long way ahead of Chelsea (£52.8m) and Arsenal (£48.1m), but the prospectus issued last year to investors targeted growth to £111m in the next five years, which would be mighty impressive.

"The money went that way"

Of course, it is TV revenue that has driven the growth in football clubs’ revenue and this is where the failure to qualify for the Champions League will hurt Liverpool. For the 2010 accounts, the Premier League has just published its revenue distribution, which included £48.0m for Liverpool, against £50.3m the previous year. The merit payment was lower, due to the seventh position, and the team was not shown live so many times.

We can also calculate the Champions League participation and performance fees for 2010, which come to €9.1m, as they will receive €3.8m for Champions League participation, €3.3m for group stage participation (six matches at €550,000) and €2.0m for group performance (two wins at €800k, one draw at €400k). According to the Guardian, Liverpool will also be allocated €17.6m from the TV pool, up from €10.1m the previous year. This means that Liverpool will get €26.7m from the Champions League, which is actually €3.5m more than the year before, despite not progressing as far – thanks to the increase in TV money. At current exchange rates, that is worth £23.2m and we can add another £1.9m to that for the Europa League, bringing in a total of £25.1m from Europe, compared to £20.2m last year.

Liverpool’s total TV money in 20009 was £74.6m, so if we subtract the £50.3m from the Premier League and the £20.2m from the Champions League, we can estimate £4.1m came from the FA Cup and Carling Cup. Assuming a similar amount for 2010, we can add the £48.0m from the Premier League and the £25.1m from the Champions League to give a total of £77.2m TV revenue. In other words, 3.5% higher than last year, even though the team’s performance was much worse.

Not bad, but the real problem comes in 2011 when the failure to qualify for the Champions League will begin to bite. That’s at least £25m revenue gone immediately. There might be some compensation from the Europe League, but even if you win that competition, you only get €6m, so that does not really help. As Professor Tom Cannon of Liverpool University said, “qualification for the Champions League remains the crucial factor in enabling the club to maintain income at current levels.” On the other hand, the additional £7.5m that all Premier League teams will receive for the new overseas rights deal will soften the blow to some extent.

However, the real key to unlocking Liverpool’s revenue possibilities is a new stadium. Anfield is a wonderfully atmospheric old ground, but its capacity is only 45,000, which is much less than Old Trafford (76,000) and The Emirates (60,000). According to Deloittes, Liverpool’s match day revenue of £42.5m is less than half of Manchester United (£108.8m) and Arsenal (£100.1m), while even Chelsea, whose Stamford Bridge ground is even smaller (42,000), earn more from this category (£74.5m). Liverpool only earn around £1.6m from each home match, which is significantly less than United (£3.6m) and Arsenal (£3.1m). Yes, it would cost a lot to construct a new stadium (though this could be offset by offering naming rights), but Arsenal have demonstrated that this can be a profitable move, especially if you can sell a few thousand corporate boxes. New chairman Martin Broughton agreed, “I think taking the stadium plan forward has to be in everyone’s interests. I think when you look at the financial logic, it has to happen. It’s inescapable that any new owner would not go ahead with the new project.”

The other way to improve your financials is to cut costs, which in the case of a football club effectively means reducing the wage bill, as it’s by far the largest expense. The easiest, though most unpopular, route would be to cash in on the top stars, like Steven Gerrard and Fernando Torres, which would have the added benefit of generating big money in transfer fees. The Daily Mail reported that Chelsea were preparing a £70m bid for Torres alone. The chairman has assured the fans that the club does not need to sell, “We won’t sacrifice our prize assets to reduce debts”, but the players may take the decision out of his hands, as they want Champions league football and must be unhappy with the club’s financial situation. That would be another vicious circle, as losing these players would then make it even more difficult to qualify for the Champions League.

"Enough about the debt"

This is why the only realistic way out of the financial mess is to sell the club. Over the past year the press has mentioned many possible buyers, including Saudi princes, Kuwaiti billionaires, Indian industrialists, anonymous Americans, Chinese gaming tycoons and our old friends DIC, but Christian Purslow’s deadlines for attracting investment have come and gone without success. To be fair, he was dealt a poor hand, having to convince investors to stump up for a minority stake. He was also hamstrung by Hicks and Gillett, who have consistently over-valued the club, e.g. recent reports mentioned an absurd valuation of £800m. However, one positive side-effect of not qualifying for the Champions League should be a reduction in the price. Furthermore, the Financial Times reported that Broughton has been given “a casting vote on all board issues, including the planned sale.”

Liverpool will have to be careful not to jump from the frying pan into the fire by finding a new owner that would also burden the club with debt. Broughton is aware of this, “It has to be the right owners and also the right financial structure – no more than a reasonable amount of debt that you would expect in any organisation of this size.” It is clear that a new owner would require very deep pockets, but how much would he need? That obviously depends on how much Hicks and Gillett want. The Americans borrowed £300m initially in 2007 (£185m to buy the shares including fees plus £113m working capital), but as we have seen the net debt has risen to about £350m, so a price of £400m would provide them with a tidy £50m profit, which is not too shabby.

"Martin Broughton - he'll take more care of you"

In addition, finance expert David Bick said that a new owner would “need to have access to very large sums of money to build the new stadium, revitalise the management and allow for strengthening of the playing squad.” A new stadium would cost at least £300m (maybe more); the transfer budget required to improve the current under-performing team could be as much as £100m (Torres said that Liverpool were “four or five class players” short of a successful side); while changing the management might cost £15m. If any of this is funded by loans, the owner would also require sufficient working capital to service the debt. When you add all this up, we are not far short of a billion, so millionaires need not apply.

Surely Liverpool are too big to fail? That’s what they said about Lehman Brothers before it went bust. There’s no doubt that the accounts make for awful reading, which was confirmed when the Premier League asked Broughton to provide assurances that the club would be able to fulfill its fixtures next season. RBS also offered assurances that they would continue to support the club until a sale is finalised, but this was only after: (a) Hicks and Gillett reduced the bank loan by paying in more of their own money; (b) Barclays Capital were hired to find a buyer. Now that the bank loans have been trimmed, the bank is unlikely to let the club go broke, especially as it is up for sale. It is also unlikely that a bank would take the unpopular step of cutting off Liverpool’s support, though it is not so long ago that Barclays made a stand over Southampton’s overdraft, ultimately pushing them into administration.

"Kop that"

However, at the risk of stating the obvious, Liverpool are not Southampton. We are talking about one of football’s great institutions with an incredible history: winning the Champions League and European Cup five times, the English League championship eighteen times and the FA Cup seven times. In marketing terms, it is still one of the leading global football brands, playing in the richest domestic club competition in the world. It surely cannot be time to say “good-bye”, but are Liverpool a good buy? Many people would not want to invest their hard-earned money, but if a wealthy benefactor had a spare billion, he just might.

What Is The Champions League Worth To Arsenal?

As Manchester City faced Spurs last week in what was virtually a play-off for the final Champions League place, the media’s hyperbole machine went into overdrive about how much qualification would be worth to the winners. However, if you looked at a variety of newspapers, you would end up very confused about the size of the prize. The Times and the Telegraph were relatively sober, talking about possible extra revenue of £20m, while the tabloids were more aggressive with the Sun describing the match as a “£50m clash” and the Mirror labeling it “the £60m showdown”. The headiest estimate actually came from the Independent, which provided a detailed break-down that apparently added up to “£70m for winning the Champions League”.

Rather than attempting to work out exactly how much revenue Spurs will earn from their unaccustomed foray into Europe, I thought it would be more appropriate to calculate how much the Champions League is worth to Arsenal for a number of reasons. First, as Arsenal have been in the Champions League for more than a couple of days, we actually have some genuine financial data to review for the Gunners.

Second, it is far from certain that Spurs will reach the Champions League. In fact, they have only qualified for the right to play a Champions League qualifying match. In years gone by, this would have effectively been a walk-over against a team from somewhere like Slovenia, but UEFA has recently modified the qualification format in order to help teams from the smaller nations reach the lucrative group phase. This has the added effect of making it more difficult for teams from the more established nations to progress and Spurs could find themselves facing tricky opponents like Lyon, Sevilla, Werder Bremen or Sampdoria. For Spurs fans, this could be horribly reminiscent of when Everton broke into the top four in 2005, only to fall at the first fence, crashing out to Villareal in the third qualifying round.

Third, Arsenal are my team, so there.

"Crouch's £50m header"

Before we try to quantify the value of getting into the Champions League, we need to think about what is relevant to this discussion. To my mind, there are five revenue streams: (a) participation and performance; (b) television; (c) match day; (d) sponsorship; (e) increase in value of the squad.

The first two of those areas come from revenue distributed by UEFA. Since the birth of the Champions League, the amount of revenue that UEFA generates from broadcast and sponsorship deals has increased exponentially from €45m in 1992/93 to €1.1 bln this season. Despite the difficult economic market, this growth shows little sign of slowing down. In fact, 2009/10 is the first season of a new, improved three year deal, which will deliver a 29% increase in the amount of revenue available for distribution to participating clubs. Net of costs and payments to national associations, this has gone up from €583m in 2008/09 to a jaw-dropping €751m in 2009/10. This pot is divided into two parts: (a) fixed sums based on participation and results (rising from €308m in 2008/09 to €413m in 2009/10); (b) variable amounts dependent on the value of the TV market of the associations represented in the Champions League (from €275m to €338m).

The above table lists the fixed sums payable to the 32 teams that qualify for the Champions League and highlights the significant increases this season. Right off the bat, each team is awarded €3.8m for participation plus another €550,000 per match played in the group phase, regardless of the result. Assuming that a club fulfills its six group fixtures (a fairly safe assumption), that’s worth €3.3m. This means that each team is guaranteed €7.1m for qualifying for the group stage, even if it loses every single game.

There is also a performance bonus of €800,000 for each victory in the group stage plus €400,000 for a draw. So, if a team really puts its pedal to the metal and manages to win all six of their group matches, they will get €4.8m. If a team qualifies for the first knock-out round (the last 16), they are awarded a further €3m. In other words, if a team gets through the group phase and wins all six group matches, it would receive the princely sum of €14.9m.

There are additional performance prizes for each further stage reached: quarter-final €3.3m, semi-final €4m, final €5.2m and winners €9m. So if you go all the way and win the damn thing, you would earn a total of €31.2m, which is serious money in anybody’s book(s).

In addition to these fixed sums, the clubs receive a share of the television money from the so-called market pool. This is a variable amount, which is allocated depending on a number of factors: (a) the size/value of a country’s TV market, so the amount allocated to teams in England is more than that given to, say, Spain, as English television generates more revenue; (b) the number of representatives from your country, so an English team (with four representatives) might receive less than a German team (with only two representatives); (c) the position of a club in its domestic championship in the previous season, so if two teams from England both reach the quarter-final, the one that finished ahead of the other in the Premier League would get more money; (d) the number of matches played in the current season’s Champions League.

This complicated, but logical system, throws up some interesting anomalies. If we examine the table above, which lists the revenue distributed by UEFA in 2008/09 for the top ten teams, we can see that Manchester United (€38.3m) actually earned more than Barcelona (€31m), even though they were absolutely hammered by the Catalans in the final, purely because they were allocated €10.6m more TV money. Similarly, Bayern Munich, who were eliminated in the quarter-finals, also earned more than Barcelona with €34.6m, as they secured the biggest slice of the TV pie with €21.5m. This is because the German TV market is among the most valuable and the revenue for the German association only had to be shared between two clubs, In comparison, the English revenue had to be split between four clubs. This factor also explains the presence of PSV Eindhoven in eighth position in the money table, even though they did not make it out of their group, as they were given all €19.6m of the Dutch revenue, being that country’s only representative.

This opens up an intriguing possibility for the red and white half of North London. If Spurs are beaten in their qualifying match, there would be a double whammy for Arsenal fans, as they would not only have another opportunity to laugh at their North London neighbours, but there would also be more money heading Arsenal’s way, as England’s TV pool would only have to be shared between three teams instead of the four usual suspects. That pot was worth €55.5m in season 2008/09, but is likely to increase to at least €70m for next season, so this would be very handy.

"Robin Reliant"

Enough of these general facts, how much have Arsenal actually earned from the Champions League? The UEFA analysis for 2008/09 lists Arsenal at sixth place with €26.8m, comprising €15.5m for participation and performance and €11.3m from the TV pool. For the current season, we don’t yet have the figures for television, but we can already work out the fixed fees, as we know the results. Arsenal will be given €3.8m for Champions League participation, €3.3m for group stage participation (six matches at €550,000), €3.6m for group performance (four wins, one draw, one loss), €3.0m for reaching the knockout stage and €3.3m for reaching the quarter-final. That adds up to €17.0m, which is more than the €15.5m earned the previous season, even though the team went out a round earlier (quarter-final vs. semi-final), which highlights the revenue growth.

Assuming that Arsenal’s share of the TV pool rises in line with the total TV revenue (€275m to €338m), ceteris paribus they would get an additional 23%, increasing their variable revenue from €11.3m to €13.9m. Therefore, a reasonable estimate of Arsenal’s revenue distributed from UEFA would be €17.0m fixed fees plus €13.9m variable fees, giving a total of €30.9m.

As anybody who has opened a newspaper recently will know, the exchange rate can also have an impact. In particular, the weakening of the Pound against the Euro over the last two years has significantly increased the UEFA revenue in Sterling terms. If we take our estimate of €30.9m, this is worth £26.9m to Arsenal at the current exchange rate of 1.15, compared to just £20.6m when the rate was 1.50. That’s a notable difference of £6.3m.

"Two greats for the price of one"

In addition to centrally generated revenue, clubs directly benefit from match day revenue. Arsenal do not separately analyse this between different tournaments, but we can still come up with a sensible guess. In the past, directors have stated that the Emirates brings in more than £3m a match, while Deloittes Football Money League estimated €25.7m for Arsenal’s 2008/09 season. We know that Arsenal played six home games that year (three group matches, last 16, quarter-final and semi-final), so that implies an average of €4.3m. At the exchange rates used by Deloittes, that suggests that each match is worth £3.6m. This is a little more than we might expect, but this figure also includes merchandise plus food and drink, so is not completely out of court. Let’s call it £3.5m a match, which would produce £17.5m match day revenue this season, based on the five matches played (three in the group, last 16 and quarter-final).

That would mean a total so far of £44.4m Champions League revenue for Arsenal this season (£26.9m distributed from UEFA plus £17.5m match day directly generated by the club).

Importantly, most of this money goes directly to the bottom line, which is why some clubs are so desperate for Champions League qualification, as it can make an enormous difference to their business model. In Arsenal’s case, Deloittes calculated that Arsenal’s Champions League revenue accounted for 20% of the club’s total revenue, which was second only to Werder Bremen (23%). In other words, although this might not be critical to Arsenal’s financials, it’s still pretty important, especially when you consider that Real Madrid’s direct revenue from the Champions League is less than 10% of its overall total.

"From Russia with love"

In addition to this tangible revenue, other revenue is also likely to increase, but is very difficult to quantify unless you’re a football club insider. Indirectly, Arsenal’s participation in the Champions League should boost their sponsorship and other commercial revenues, both in the short term through contractual bonuses, and longer term by strengthening the club’s brand attractiveness through increased exposure and profile. However, a former Barcelona vice-president admitted, “What is harder to put into figures is the impact it has on your brand. That is very difficult to discern. There is no doubt we got a massive boost from winning the competition. We were on television and on the front of all newspapers all around the world, but that increased exposure and interest doesn’t lead to an immediate increase in the value of your sponsorship deals.”

I would be surprised if Arsenal’s sponsorship contracts did not included some sort of incentive clauses rewarding the club for reaching the later stages of the Champions League, but my guess is that they’re not overly lucrative, given that Arsenal’s commercial deals were negotiated primarily to secure front-loaded funds to help pay for the construction of the Emirates. However, going forward, this could easily be worth another £5-7m.

"In the Nick of time"

Finally, the value of Arsenal’s players should have increased as a result of competing among Europe’s best and placing themselves in the shop window. As an example, Nicklas Bendtner is officially the fourth highest scorer in this season’s Champions League with five goals, only behind Barcelona’s Lionel Messi, Real Madrid’s Cristiano Ronaldo and Bayern Munich’s Ivica Olic. That must have added a few million to his transfer fee. Of course, this will only generate additional revenue if the player is actually sold, which Arsenal may not want, but I think you understand my point. On a related theme, taking part in the Champions League helps the club to attract and retain players, hence so much interest in what will happen to Fernando Torres and other “stars” at Liverpool now they have failed to achieve the qualification “guaranteed” by their manager.

A study commissioned by MasterCard suggested that the winners of the Champions League could make up to €110m, though this included €30m from sponsorship bonus payments, €14m commercial revenues and €15m increased squad value, all of which seem highly speculative to me. This heady estimate does makes sense when you appreciate that MasterCard is an official sponsor of the Champions League, so clearly has a vested interest in calculating as high a figure as possible. Having said that, it is difficult to argue with the man who conducted the research, Professor Simon Chadwick of the Sport Business Strategy department at Coventry University, when he said, “The competition continues to be an important source of revenue and commercial activity for clubs, especially for those that qualify for the knockout phase of the competition. This inevitably makes a significant contribution to the annual turnover of the clubs involved.”

"It's worth this much"

What about if Arsenal just missed qualification to the Champions League? Surely the Europa League would compensate the revenue shortfall to some extent? Not really. If you manage to battle your way through that interminable competition and end up with the trophy, you would still only receive €6m, compared to the €31m awarded to the winners of the Champions League. Or, to put it another way, the prize money at the Champions League is more than five times as much as the Europa League. Given the paltry attendances “enjoyed” by Europe’s secondary tournament, it is hardly surprising that some teams effectively sabotage their own chances in this competition by playing their reserves. From a financial perspective, it’s obviously much better to focus your limited resources on trying to qualify for the Champions League.

Furthermore, the revenue gap between the Premier League and the Champions League is also closing. In the Premier League all clubs receive £14.6m for participating, £10.1m for overseas rights plus another £2m from sponsorship and licensing deals. On top of that, the winners receive £16m for winning the competition plus £500,000 for every match of theirs shown live on TV (a guaranteed minimum of ten appearances, but let’s assume there were 15, giving £7.5m). That produces a grand total of just over £50m for winning the Premier League.

How about the Champions League? First we have the €31.2m participation and performance fees we listed above. To that, we need to add an estimate for the TV pool. As a proxy, let’s take the €18.8m earned by previous Premier League champions Manchester United in 2008/09 and uplift it by the 23% projected increase in total TV money in 2009/10 to give us €23.1m. That produces a total of €54m for winning the Champions League, which is equivalent to £47m. That’s only a whisker away from the £50m for winning the Premiership. The difference is that one takes 38 games to win, while the other one only requires a “lucky” 13.

"Not so super?"

There is little sign of this gravy train being derailed. According to a report by Futures Sport + Entertainment, the Champions League final overtook the Super Bowl as the most-watched sports event last year with a “reach” of 206m people compared to 162m, even though that was the best ever figure for the NFL’s flagship. The analysts said that the Super Bowl “is still growing, but, extraordinarily, the Champions League is growing faster with room for significant expansion.” That probably refers to UEFA’s decision to move the final from its traditional Wednesday evening to Saturday, which makes it more convenient for Asian and American viewers. Indeed, this year’s final between Inter and Bayern Munich will be televised live in China on CCTV-5 and Fox Television in the US, virtually guaranteeing an increase in the viewing figures.

We can now understand why the economically savvy Arsene Wenger is so proud of Arsenal’s record in Europe’s premier competition. After the comprehensive defeat of Fulham on Sunday, he argued, “I believe there are two big trophies in England. The Premiership and to qualify for Champions League, and that’s what we have done. For me it’s not enough but it is the minimum requested, and we’ve done that 13 years on the trot now which is not too bad.” Many fans would prefer the team to win an actual trophy, but you can see where Wenger is coming from.

"We've qualified again"

Arsenal’s chief executive, Ivan Gazidis, says of the Champions League, “It is hugely prestigious, one of the competitions you have to win if you want to be thought of as a great club. Financially it is important over time, but it is not life or death.” That may be true, but we have seen that with a reasonable run, the competition delivers at least £44.4m revenue to Arsenal – and that does not include any additional sponsorship revenue, which could bring in a further £5-7m, or any increase in the value of the squad. Therefore, anybody suggesting that the Champions League is worth around £50m to Arsenal will get little argument from me or, indeed, Arsenal’s board.

Does Arsenal's Policy Make Sense?

After a deeply dispiriting, hugely disappointing end to the season, including two abject performances against the might of Wigan and Blackburn Rovers, it is hardly surprising that some Arsenal fans are beginning to question whether Arsenal’s policy is still the right one. By this, I don’t mean that they are questioning whether the 4-3-3 formation is preferable to good old-fashioned 4-4-2 (though they are), but whether the club’s policy of shunning big money transfers, while focusing on youth development will produce success.

Actually, when we talk about the transfer policy, that effectively also covers the wages policy, for these are two sides of the same coin at Arsenal with Arsene Wenger controlling an overall budget for transfers and wages. In particular, Wenger has admitted that Arsenal cannot afford to follow a policy that involves both high transfers and high wages. The first part of this was already obvious to the club’s supporters with little money being spent on bringing new players in, but what might have been less obvious is that Arsenal have found enough money to substantially increase the wage bill – even though the wage structure is as tight as it ever was.

Interestingly, their North London rivals Tottenham have adopted almost exactly the opposite approach, namely spending a huge amount on purchasing new players, while having a payroll about half as large as Arsenal’s. A better comparison for Arsenal might be another team from the Big Four (at least one that’s been there longer than five minutes). Given that Chelsea operate in a different financial plane, maybe the best comparative for Arsenal is Manchester United, who have outspent Arsene’s team on both counts. Over the last four years United have spent about £55m more on salaries, while their net transfer spend is also £45m higher (£125m if Cristiano Ronaldo’s world record £80m sale to Real Madrid is excluded as a spectacular one-off). So, United have spent at least £100m more than Arsenal in this period, but they do have a lot of silverware to show for it: one Champions League and three Premier League titles, which is precisely four more trophies than Arsenal.

"The anti-Arsenal: Shirty Harry"

In fact, the Gunners have consistently spent less than their rivals over the last few years in the transfer market. Since the 2005/06 season, Arsenal is the only club in the Big Four (and the nearest challengers) to make money from buying and selling players. Incredibly, their net transfer spend surplus of £28m is at least £100m better than their peers – with the exception of United, because of the Ronaldo deal. The other clubs’ net spend is significantly higher: Chelsea £94m, Liverpool £84m (rubbishing Benitez’s claim that he has lacked funds), Tottenham £92m (the famed Redknapp effect), Aston Villa £90m (thank you, Mr. Lerner) and, of course, Manchester City with a barely credible £236m (“money can’t buy me love” – or indeed 4th place).

For Arsenal to spend not just less, but so much less than these clubs and still remain competitive is testament to the incredible job that Wenger has done with the funds available. The manager has steadfastly refused to endanger Arsenal’s financial security by splashing out large sums on over-priced, big name players. If there were any doubt, the club’s stance was clarified by new chief executive Ivan Gazidis last September, “We believe transfer spending is the last resort. That’s a sensible view to have. Re-signing players is a far more efficient system.”

These comments were very revealing. As we have seen, the transfer budget is only part of the story at Arsenal, but here was Gazidis explicitly eulogising re-signing players in the current squad. In this material world, that effectively means awarding the players improved terms and this was confirmed in the last interim accounts, when chairman Peter Hill-Wood described the re-signing of 17 first-team players on long-term contracts as an “investment in a very talented group of players” and as the “best means of protecting the value of one of our most important assets.” While Arsenal’s activity in the transfer market last summer was minimal, they were extremely busy building the team from within, announcing new deals for Van Persie (£60,000 to £80,000 a week), Walcott (£40,000 to £60,000 a week), Song, Denilson, Bendtner, Eduardo and Fabianski (!) amongst others.

"Theo gives thanks for his pay rise"

While explaining how the move to the Emirates has helped boost the club’s profits, director Danny Fiszman actually boasted, “the wage bill is very similar to Manchester United’s and substantially above Liverpool’s. It’s substantially below Chelsea’s, but that is expected.” Not only that, at £104m it’s considerably more than the payroll at the chasing pack: Manchester City £83m, Villa £61m, Spurs £59m, Everton £49m. Boosted by massive growth in match day receipts and broadcasting income, Arsenal’s annual wage bill has increased by almost 60% in the last five years from £66m to £104m. Despite this, the wages to turnover ratio has actually fallen from 57% to a highly respectable 46%, which is the second best in the Premier League.

In this time, Arsenal’s headcount has risen by 30% from 293 to 384, but this is almost entirely due to (cheap) ground staff and administrators. The number of players is virtually unchanged at 62, so the increase in wages is purely down to significant inflation. All these figures are from accounts that are a year out of date and the salaries growth in the interims implies that Arsenal’s annual wage bill will rise to £120m, which is probably reaching the upper limit if the club wants to remain prudent.

We can be reasonably sure that this is the case, for Arsenal have a very conservative wage structure. At least they do to the extent that they very rarely pay top dollar for the best players, which can be seen by the list of the top 50 footballers’ salaries, featuring just one player from Arsenal: Andrei Arshavin down in 47th place. Cesc Fabregas has almost certainly joined this august list, but other clubs still feature far more often: Barcelona 8, Chelsea 7, Real Madrid 6, Manchester City 6 and Manchester United 4. Arsenal’s approach is different: the top players might not earn that much, but the rest of the squad is relatively well paid.

"Worth £10m of anyone's money"

Does this egalitarian ethos make sense? One result is that average players like Almunia, Denilson and Diaby earn more than their talents deserve, which is a double whammy, as it would also be difficult to sell them with other clubs unwilling to match their inflated salaries. The other implication of the rigid wage structure is that Arsenal will struggle to attract world-class players like Fernando Torres or David Villa. This can be demonstrated empirically by the number of high transfer fees paid, assuming that this is what it takes to purchase a world-class player (though admittedly such a list will include a few duds). Arsenal have only bought seven players with a fee over £10m (Vermaelen, Arshavin, Nasri, Hleb, Reyes, Wiltord and Henry), while Chelsea have bought three times as many (21), Manchester United have bought more than twice as many (16) and even Liverpool have bought more (9).

What is really striking about the wage bill is the allocation, as much of it is given to the youngest players, who earn much more at Arsenal than other clubs. For example, it was reported that Aaron Ramsey was offered £850,000 by Arsenal compared to £350,000 by Manchester United. Granted, that now looks like money well spent, but it is indicative of the different wage policy. From a financial perspective, this is a shrewd strategy, as it protects the players’ value in terms of future transfer fees, but it does mean that there is less money available to improve the first-team squad. Another benefit of this plan is that it encourages loyalty to the club (or Arsene) among young players, but there is also the risk of complacency setting in. While many fans understand the strategy, it still goes against the grain to reward these players for: (a) not winning any trophies for five years; (b) spending lengthy periods in the treatment room with assorted injuries and ailments.

The problem is that it is very difficult to cut wages, unless you live in Greece. As Arsenal’s annual report said, “There continues to be significant upward pressure on players’ wage expectations and the activities of other clubs in the market and the introduction of the 50% income tax rate from April 2010 mean this looks set to continue.” This is compounded by the weakness of Sterling, which has declined from €1.50 to €1.15 to the Pound over the last couple of years.

"Suited and booted"

Let’s take the example of a foreign player who earned £60,000 a week two years ago. His annual gross salary would have been £3m with take-home pay of £1.8m (€2.7m). Following the increase in the tax rate from 40% to 50%, net pay would fall by £300,000 to £1.5m. That is further reduced in Euro terms from €2.250m to €1.725m, thanks to Sterling’s decline. In total, the annual salary has effectively been slashed by almost €1m (from €2.7m to €1.725m). I don’t care how well paid anyone is, a 35% cut in your salary has to hurt. So, what’s the player going to do? That’s right – ask for more money.

Some have argued that this does not matter, as many footballers in Spain have not actually been paid by their clubs, which is one way of cutting wages. This has resulted in the Spanish players’ union threatening to strike. This may be a factor for smaller clubs, but I’m not sure that it is that relevant for Arsenal, as they should theoretically be competing with the likes of Barcelona and Real Madrid for the cream of the crop – and they are paying their players.

The market is also artificially inflated by the presence of extremely wealthy benefactors like Roman Abramovich and Sheikh Mansour, leading to the so-called “financial doping” so despised by Arsene Wenger. We know all about Chelsea’s enormous wage bill (about £150m), but it surely won’t be long before Manchester City get close to this. Their last accounts reported a 50% increase in salaries from £54m to £83m, but that does not include their spending spree last summer, when they attracted many big names (Adebayor, Tevez, Barry, Lescott, etc) to the club with generous packages. Conservatively assuming £100,000 a week, City’s payroll has probably risen by over £40m to around £125m this season.

"The artful dodger"

This is why Arsenal have developed a squad-building technique that is very different from their main competitors in the Premier League. As explained by Wenger, “The club’s strategy is to favour the policy of youngsters ahead of stars and to count on the collective quality of our game.” Rather than buy established players, Wenger would prefer to search for unpolished gems, so he has set up a worldwide scouting network. The financials are compelling: instead of spending £15m on a transfer fee plus £20m on wages (five-year contract at £80,000 a week), the club can get several teenagers for minor compensation fees, say, £250,000. Not all of them will make the grade, but those that don’t are usually sold for a tidy profit. Arsenal are now recognised for their youth development programme and state-of-the-art training facilities, while former player Gilles Grimandi, now scouting in France, adds, “We are able to attract the most promising prospects, because we have a calling card stamped ‘Arsene Wenger’. They know they will get the chance to play. It is one of our principal arguments.” And, of course, the great money paid to youngsters at Arsenal helps.

What most people don’t appreciate is that there are, in fact, two elements to Arsenal’s youth policy. The one that everyone understands is buying young players from other clubs, developing them for a few years, hoping that they will ultimately become a fixture in the first team, but selling them for good money if they do not. You could argue that the emergence of Cesc Fabregas is enough on its own to justify this policy, but there have been other success stories. Alex Song is a case in point, especially as Wenger saw potential that most others didn’t, but Nicklas Bendtner is another good example.

However, given that there are only 11 places available in a team, the law of averages would suggest that most prospects are sold. The process was explained by one of Arsenal’s scouts, Tony Banfield, “If it is felt they might not be good enough, they are sent out on loan to get more first-team football with the idea that it might improve them. When they return, if they are better, they might stay, otherwise the club look to sell them.” So, not only does a loan player benefit from playing experience, but he is also placed in the shop window to enhance his transfer value. In this way, Sebastian Larsson and Fabrice Muamba were first loaned then sold to Birmingham City in 2007. In addition, the club profits from sell-on clauses, the best example being David Bentley, who was sold to Blackburn for an initial £2.5m with a further £7.5m going Arsenal’s way via his subsequent transfer to Spurs.

"JET - do you wanna be in my gang?"

The second strand is what you might describe as the extreme youth policy, which was outlined by Wenger two years ago, “If you want to completely develop a player, ideally you take him at the age of five and you bring him right through to the first team. I have tried to build an academy that will recruit young local lads. At present, we have exceptional under-14s and under-16s. Technically, they are extraordinary.” He continued, “My priority will always be to keep the players I already have, because above all I believe in the virtues of teamwork. I want to have success by building a team with a style, a know-how, a culture of play specific to the club.” The idea is to bring a talented group of players together for sustained success. This is the approach that Barcelona, and Ajax in days gone by, have adopted. Some argue that this is too much of a gamble and it’s certainly a courageous long-term strategy in this most short-term of industries. However, as the great Johan Cruyff said, “If you have a good youth development system, then it is obvious the first team will one day be good too.”

The great hope for Arsenal is the exciting group of players that passed their way to a glorious success in the FA Youth Cup last season, most of whom have been together since they were 11 (or younger) at the Hale End Academy. Nine of the starting team that demolished Liverpool in the final are English, fulfilling Wenger’s vision of nurturing local talent. Many of them have already emerged in the Carling Cup, but are not quite ready for regular starting places in the first team, so have been loaned out with a fair degree of success: Jack Wilshere (Bolton), Jay Emmanuel-Thomas (Doncaster), Henri Lansbury (Watford), Kyle Bartley (Sheffield United), Gilles Sunu (Derby) and Sanchez Watt (Leeds). Meanwhile, Craig Eastmond has made a handful of appearances for Arsenal in the Premier League.

The importance of developing players and keeping them together, as opposed to trying to integrate new buys, seems intuitively correct, but luckily for Arsenal fans it has also been proved by statistical analysis. In their intriguing book “Soccernomics”, Simon Kuper and Stefan Szymanski used twenty years of research on football clubs to demonstrate that “spending on salaries explained 92% of their variation in league position”. In plain English, the higher your wage bill, the greater your chance of success. On the other hand, there is almost no correlation between transfer spending and doing well. Their analysis only goes up to 1997, but this year’s Premier League tells the same story. With one game remaining, the top three positions are filled by the three teams with the largest wage bills – in exactly the same order. Chelsea pay the most and lead the table, followed by Manchester United with the second largest payroll and then Arsenal whose salaries are third highest. In fact, the top seven places in the Premier League are occupied by the first six teams in the “wages league” plus Tottenham (who are 8th).

But it’s a double-edged sword, as wages are also the largest cause of clubs going into debt. The first sign that Portsmouth were in trouble came when the players’ salaries were paid late. As a director at one of Europe’s top clubs said, “We’re a great business, except for our players’ wages.” This has led to a widespread belief that footballers’ salaries should fall, but this seems unlikely, given the simple reality that the more a club pays players, the more matches it will win.

Billy Beane, the legendary general manager of the Oakland Athletics baseball team, has praised Wenger’s methods. The subject of Michael Lewis’ wonderful “Moneyball”, Beane is one of the world’s most influential sports executives, having used statistical data to find new ways of valuing baseball players, and is a great admirer of the Arsenal manager, “Nothing strangulates a sports club more than having older players on long contracts, because once they stop performing, they become immoveable. And as they become older, the risk of injury becomes exponential. It’s less costly to bring on a young player. If it doesn’t work, you can go and find the next guy, and the next guy. The downside risk is lower, and the upside much higher.”

As they say, imitation is the sincerest form of flattery and many other clubs now strive to emulate Wenger’s policy. Even those perennial big spenders, Chelsea and Manchester City have lauded Arsenal’s youth set-up as the way forward. Admittedly, Chelsea’s compliments came from Guus Hiddink, just before he exited stage left, and the source of City’s praise was Garry Cook, their appalling chief executive, but even Fabio Capello lavished fine words on Arsenal’s structure, “I’ve had the opportunity to look at Arsenal’s academy and their work is incredibly good. It’s a very important example for the other English academies.”

"Thumbs up for Arsenal's academy"

But is it successful? In terms of winning trophies, obviously not (or not yet). Nor can you say that the youth policy is a complete success when your central defenders have a combined age of 67 (Sol Campbell 35, Mikael Silvestre 32). However, Arsenal have qualified for the Champions League ten years in a row, which hardly any other club in Europe has managed. Furthermore, their record in the Champions League since the break-up of the “Invincibles” (after losing to Barcelona in the 2006 final) is no worse than that exalted team. If you allocate 5 points for winning, 4 points for reaching the final, 3 for semi-final, 2 for quarter-final and 1 for last 16, the current team acquired 8 points in the last four seasons, which is exactly the same as their more experienced predecessors. Yes, I know anyone can play with numbers, but it still suggests that the team is not on a downward trend.

The team’s performance should also be considered in the context of the dramatic changes in the football landscape post-Abramovich. Arsenal have been competing against billionaires for whom money is no object, who have tried to buy immediate success, e.g. Chelsea spent nearly £400m in the first three years after the arrival of their Russian oligarch; Manchester City splashed out over £250m following the influx of Arab money. Some clubs, notably Manchester United and Liverpool, have decided that it does not matter if they don’t have any money, opting to build up substantial debt instead, while other clubs have adopted a “see no evil, hear no evil” approach to potential saviours, which has predictably ended in tears, e.g. Portsmouth, West Ham.

This relative financial weakness has been compounded by the constraints arising from the construction of the Emirates stadium. In the future, this will generate significant profits, but there is no doubt that Wenger has been operating with one hand tied behind his back over the past few years, forcing him towards the youth policy. Making a virtue out of necessity, Wenger advised the board, “We have good youngsters and can still compete at the top level.” This was in stark contrast to comments he made in the 2003/04 season, “I'm convinced that up front now you need to be young. A goalkeeper is best between 30 and 35. Central defence, I would say best age 26 to 34. Midfield between 26 and 32 and a striker between 24 and 30. Those are the top ages.”

"Wengerball"

At least Arsenal will not fall foul of UEFA’s financial fair play initiative, which will be phased in from 2012. Clubs will have to comply with these new rules before they are allowed to take part in the Champions League. As it stands, Chelsea and Manchester City do not qualify, though cynics might say that this is before their lawyers get involved.

In any case, there should be great respect for what Arsene Wenger has done at Arsenal these last few years. He has guided the club through the substantial upheaval of leaving its spiritual home of Highbury for the Emirates; developed a squad of exciting young players; and kept the team competitive, while playing the most attractive football in the country. All of this despite having to operate under major financial constraints at a time when other clubs have been flush with new money (both legitimate and dodgy). This is no mean feat, but there is a risk that Wenger has become too focused on the club’s finances, which is presumably why Michel Platini chided him for having a business mentality, rather than a football one.

Now that we know that the club has a large transfer budget, it may be that the emphasis on youth is tweaked this summer. The team is too inexperienced, though this has been exacerbated by the numerous injuries, and there is optimism that this will be addressed. Only yesterday, Wenger said, “We have plenty of young players. If we bring some players in, then they have to be experienced players. The additions will be minimal, but if there are some, they have to be really top class.” So, not a major over-haul of the policy, just a fine-tuning.