Arsenal this season, 2013-14

Let’s now turn to this season, 2013-14.  This is when the new Premier League TV deal with Sky and British Telecom begins, bringing a 70pc hike in the value of the domestic TV rights.  That’s big news: it could add £35m to Arsenal’s revenue, assuming a fourth-place finish.  Together with a last-16 place in the Champions League, that could make for a net cash generation of over £40m, before any player trading.  

And it doesn’t end there.  Next season, 2014-15, will see new sponsorship deals kick in, with Adidas replacing Nike on the kit, and new terms with Emirates on the shirt and the stadium.  The exact value of these deals is not entirely clear, but it looks to me as though they could bring in another £25m a year, taking net cash generation to around £65m (always assuming fourth place in the Premiership and last 16 of the Champions League).  

So when oft-criticised chief exec Ivan Gazidis claim that Arsenal will have the money to compete with the world’s leading clubs “in the next two years”, as he did at this year’s fractious AGM, those are the numbers he has in mind.  It doesn’t look like an empty boast.  

Arsenal 2012-13

My last post suggested that Arsenal were about to start generating a lot of cash.  Time to explain why, starting with the current season.

We already know that player trading last summer will be bringing in just over £10m, because the club has disclosed that.  We also know that a similar amount will be coming in from Barratt Homes (see previous post).  And we also know that the club is through to the last 16 of the Champions League.  That’s the stage they got to last season – but this season the prize money pool is 20pc bigger.  So Arsenal can look forward to a 20pc rise in their earnings from the competition, even without progressing to the next stage.  

Put all that together, allow for some inflation in player wages, and it looks to me as though net cash generation this season was on course to hit £20m.  Wenger then spent £10m in the January transfer window (on Malaga’s Monreal), thus leaving an equal amount for the board to add to the club’s pile of cash.  And it could get better still.  Bayern Munich are odds-on to knock Arsenal out of the Champions League when they meet, but if Arsenal could prevail, they’d earn perhaps another £4m.  So the club is on course to record a rather impressive surplus this season.  In a future post, I’ll look at what next season might bring.

Arsenal’s debt burden

My last post promised a look at Arsenal’s debt levels, often the subject of criticism from fans who’d like to see more money splashed out on transfers?  After all, the Emirates cost some £400m to build.  Is the resultant debt a millstone round the club’s neck for years to come?

Well, when last season ended, Arsenal’s net debt (total borrowing, less cash in the bank) stood at just under £100m.   That’s about 3x times underlying cash flow (or earnings before interest, tax, depreciation & amortisation, to give it a more technical name).  In business circles, a multiple like that is usually considered acceptable, though any increase above that level would be frowned upon. 

So far so good.  But the net figure doesn’t tell the whole story.  Let’s look at the two component parts, starting with total borrowing.  The bad news is that there’s a lot of it: just over £250m, most of which represents bonds issued in 2006 to pay for the new stadium.  The good news is that it doesn’t cost too much: the annual cash interest bill is running at about £13m, and annual repayments are only about £5m a year.  True, that’s a combined total of £18m a year and you could buy a good player for that. 

But here’s where the second component of net debt comes in: cash in the bank.  There’s over £150m of it!  Some of it has to stay there, to provide security for the bond holders – but only about £30m.  The rest can be used however the club likes.  That could include blowing most of it on buying players.  But that would take the net debt multiple above 3x underlying cash flow, which – as I argued above – would start to look imprudent.   And Arsenal’s directors seem to think the same way – they warned in the 2010 annual report that significant changes in net debt were “unlikely in the foreseeable future”. 

So, the bottom line is this.  Arsene Wenger can spend whatever cash the club generates each year, but not more, and preferably slightly less – and the cash in the bank will be used, not to buy players, but to pay off a little of the debt each year.  That is the modern-day Arsenal way.  And whilst it may seem rather dull, the truth is that Arsenal are about to start generating serious amounts of cash.  In my next post, I’ll explain why.

Arsenal in 2011-12

This blog has, so far, dealt only with the three big west London clubs.  But the idea has always been to add other clubs to the mix.  So let’s now look at Arsenal.  Who knows – perhaps we can help Theo Walcott decide exactly where to pitch his wage demands.   

First, let’s see how Arsenal’s finances stood at the end of last season – a significant one, in that it was the first year in four that the accounts were not dominated by property development.  Over the three previous years, 2008-11, nearly a third of Arsenal’s revenue came from the sale of housing built on the old Highbury stadium.  That was almost as much as they took in at the gate over the period.  But last season, property sales dwindled to hardly anything. 

Free from that distortion, 2011-12 gave us the first clear read on Arsenal’s finances for perhaps a decade, since construction of the Emirates first became a factor.  And on the face of it, the outcome was unprepossessing: a £16m operating loss.  But on this blog, we’re more interested in cash flow than profit, and in cash terms things were somewhat better: an overall outflow, but only a negligible one. 

That’s respectable enough – but shouldn’t it have been better?  After all, the year began with the sale of Fabregas and Nasri for a whopping aggregate of some £60m.  But offsetting that was expenditure of nearly £50m, chiefly on Arteta, Gervinho, Mertesacker and Oxlade-Chamberlain.  It’s also probable that the Fabregas and Nasri fees weren’t received in full in the year.  Hence cash in from transfers was almost exactly equalled by cash out. 

Does that mean there’s a windfall to come this season, when the balance comes in from Barcelona and Manchester City?  Yes: it looks as though they still Arsenal £16m.  Trouble is, Arsenal in turn owe money to other clubs on previous player purchases: £23m, to be precise.  So the net outflow from settling all those outstanding debts will be about £7m. 

However, there may still be a property windfall to come.  Some of the land adjacent to the stadium has recently been sold to Barratt, for £26m.  And the club still owns undeveloped land on the Hornsey and Holloway Roads, which the accounts suggest may be worth at least £10m.  In my next post, I’ll look at where that leaves Arsenal’s debt burden, often the target of criticism from fans who’d like to see more money splashed out on transfers.

Fulham's new stand

This summer, the borough of Hammersmith & Fulham granted planning permission for Fulham FC to make some big changes at Craven Cottage.  It all revolves around the Riverside stand, which is going to be enlarged – and transformed beyond recognition in the process.  Below is an artist’s impression of what it will look like; there are more images here. So, what are the economics of all this? 

 For a start, the capacity of the ground will be increased by 4,300 – from 25,700 now to 30,000.  At present, each Craven Cottage seat generates an average revenue of about £23 per (domestic) home match.  So if the new seats can be filled at that kind of rate, they would generate just over £2m of extra revenue each season.

But it might actually be more than that, because the new stand will provide better spectator and corporate hospitality facilities than those currently on offer at Craven Cottage.  And that means that the seats should command commensurately higher prices.  That’s one reason why, for example, seats at Stamford Bridge bring in over £40 per domestic home game (that’s my best estimate, anyway – Chelsea are a bit cagey about disclosing their gate receipts).  So, with a bit of extra pricing power and a fair wind, the new Riverside stand might earn Fulham an extra £2.5m a year.

(Incidentally, seats at Loftus Road appear to bring in just under £20 per domestic home game, or about 15pc less than at Craven Cottage.  Again, that’s a best estimate based on incomplete disclosure by the club – but it would seem to tie in quite nicely with what we know about Loftus Road’s relatively dilapidated condition.)

So, how important would an extra £2.5m a year be for Fulham?  Well, I’ve argued here before that the club has been more or less self-financing ever since the Great Escape season of 2007-08, when Lawrie Sanchez blew £20m-odd in the transfer market (not all of it wasted, by the way – the likes of Davies, Konchesky and Baird have served the club well).  And cash out has also been balanced by cash in on an underlying basis – i.e. stripping out the buying and selling of players (invariably a net cash outflow) and earnings from the two Europa League campaigns.  On that basis, an extra £2.5m points toward a small underlying cash surplus each season – enough to prime the transfer kitty, but basically still obliging the manager to finance player purchases with player sales.

That leaves one question outstanding – where’s the money going to come from?  Because make no mistake – this is going to cost.  The planning application documentation puts the cost at a staggering £30m.  You could build a whole new stadium for that – Southampton, Stoke City, Sunderland, Swansea City and Wigan already have.  But the site here is a particularly tricky one, hemmed as it is by the river, the park, and the houses.  Arsenal had a similarly cramped site at Ashburton Grove, and it cost them nearly £400m to put a new stadium on it.  

It’s just about conceivable that Fulham could borrow £30m from a bank.  If I’m right about the enlarged stand generating £2.5m of income a year, then that would be enough to cover the interest on a £30m loan, and leave a bit left over for paying down the principal.  But it would be a slow process, and banks aren’t all that keen to lend to anyone at the moment, least of all football clubs.  So it looks to me like this is a job for chairman Mo and no-one else.  No wonder he felt the time was ripe to cash in on Harrods.  The Mohammed Al-Fayed Stand, anyone?  For the financial support he’s given the club down the years, it’s the least he deserves.