Welcome to the first guest post in a while from resident Grover (Thomas, It’s up for grabs now ) and financial whizz Brendan Hasssett. Part two shall arrive tomorrow morning. A great read, I hope you enjoy it!
Will Arsenal rule the world under Financial Fair Play Regulations (FFP)
(All figures in GBP unless stated otherwise)
Robin Van Persie has been in incredible form since returning from injury on New Year’s Day. 31 goals in The Premier League (PL) in 2011 is a remarkable statistic. His hat-trick against Chelsea lifted the spirits of Gooners everywhere and prompted them to re-assess the bleak start to the season. But with Van Persie stalling on early transfer talks, can Arsenal afford to pay him a salary close to what may be on offer elsewhere, and can they attract a few more top names and pay them similar salaries?
“I don’t have the inclination to go anywhere. This is the best team for me to be in.”
“The bottom line is that I want to win trophies with Arsenal, not with anybody else. I know you can win trophies in many countries and in many ways, but I want to do that in our way and in an Arsenal shirt.
“I’m sure I could win things at another team in another country, but would it feel like our trophy, my trophy? I’m not sure it would. Anything we win here will come from the heart and that’s what I want.
“It’s my dream and I see no point in speaking about other teams when I have these dreams. I think other people know that about me; I’m just hungry to win with Arsenal and that’s it.”
The above quotes from Van Persie were made after the 2-1 win against Barcelona and before the Carling Cup Final defeat to Birmingham City. Does he still feel the same? He was also speaking to the official club magazine. Can we rely on him to follow through with this and accept a smaller salary that may be on offer elsewhere? Does he still feel he can win trophies with Arsenal after the end of season collapse and flurry of transfer activity in the summer? Only he knows at this time and we will just have to let this one pan out until next summer but there must be a reason he is stalling? Nevertheless, I think it’s fair to say his current salary, (reportedly 70,000 per week), will have to be substantially increased to retain his services.
This season is the first when accounts come under the scrutiny of UEFA’s FFP regulations and Arsenal are well placed, reporting profits and sitting 5th in Deloitte’s annual Money League. Are they poised to conquer the world and is Arsene Wenger’s goal to make the club number one in the world achievable?
“I had a vision and I still have one. To make this club the best in the world” A Wenger.
If we listen to the board the fans just have to bide their time to see substantial success. FFP will level the playing field. Will the club march up level to Real, Barcelona and Manchester Utd?
This year saw a dramatic drop in profit with a 12.6m after tax result (2010 61m). Considering that property sales contributed 12.2m pre-tax profit and that the club made a profit on player sales of 6.3m these results need closer scrutiny. However, the club’s cash reserve also increased to 160.2m (2010 127.6m).
To be fair to the club any profit is a credible performance when one looks at the rest of the PL. In 2010 only four clubs managed to turn in a profit. However, the club’s profit can be pinned down to a lack of significant net spend in the transfer market.
So how is the club doing and how is the future looking? Looking closer at the accounts we see that there are three principle revenue streams that contribute to turnover; match day income, broadcasting and commercial revenue.
Matchday Income and The Emirates Stadium.
The Emirates stadium has been incredibly successful. Only two clubs in the world make more from matchday income, (Real Madrid and Man Utd). This is a staggering achievement and dispels the myth completely that it is holding the club back. Arsenal have all but eliminated the advantage of the 76,000 capacity Old Trafford. Despite the extra capacity Man Utd only made 6.6m more in 2010 (100m) from Old Trafford than Arsenal did from The Emirates (93.4m). Although the 2011 results from both clubs show Man Utd gaining another 8m advantage. Primarily because of the extra games played due to getting to the final of the CL and progress in the FA Cup. Considering that Arsenal make more than Barcelona, Inter, AC Milan, Liverpool, Bayern Munich and the rest, this is a stunning performance when compared to the last season at Highbury (2006) when match day income was 44m. This year the stadium cost the club approx 13.5m in interest plus 5.9m capital repayments. The stadium repayment interest rate is fixed for the life of the bonds until 2031. After these repayments this provides an additional net 30+ million per year over the Highbury days.
Broadcasting revenue was also stagnant in the 2011 accounts at 85.2m (84.6m 2010). An earlier exit from the CL was offset somewhat by extended runs in the FA and Carling Cups.
Broadcasting income is also dependant on the amount of times Arsenal are shown live (and participation in the CL). It also naturally follows that a drop out of the top four and a non-involvement at the end of the season will see less games shown featuring Arsenal. Sky and ESPN have a commitment to show all the PL clubs a minimum amount of times. However, they also have a degree of flexibility and this is most evident towards the season finale when the teams in contention will feature more.
Barcelona and Real Madrid, for example, have the power to negotiate their own TV deals while PL clubs benefit from a deal negotiated by The Premier League. Liverpool’s recent suggestion to allow PL teams to negotiate their own deals looks like a non-runner. Such a change would require ratification by 14 clubs and this is highly unlikely to be approved by the smaller clubs, which would be like turkeys voting for Christmas.
Retail and Commercial Revenue.
This element of the accounts stands out from the rest. While the Emirates revenue brings the club into the top three in the world, the commercial activities are to say the least mid-table. (13th in the money league). In fact this area has shown little growth. It is interesting to look at perhaps our principle ‘established’ big club rival in this area.
Arsenal v Man Utd last four years comparison: Retail & Commercial Revenue.
Arsenal Man Utd
2008 44.4m 64.0m
2009 48.0m 69.9m
2010 43.9m 81.4m
2011 46.3m 103.4m
Clearly Arsenal are a full lap behind Utd in earning power. Having closed the gap on matchday income, Arsenal disappoint when it comes to commercial income. The recent financial report points to a greater effort in this area and Tom Fox has been appointed to head a commercial team to drive up revenue in this stream. With key sponsorship agreed until 2014 (Shirt sponsorship rights & kit deal) this is going to be a difficult task. (There may be a possibility to re-negotiate or buy out the deals). The stadium naming right is tied until 2021. The pre-season tour to Asia was clearly a commercial decision. However, it looks like it will still be some time before we see these numbers rise dramatically. At this year’s AGM Ivan Gazidis said we will see evidence of this in next year’s accounts. So a hint there of stuff in the pipeline.
Commercially, the four clubs ahead of Arsenal in the money league outperform Arsenal by a significant amount, as do others in the PL.
Financial Power, Financial Fair Play and the future.
The four clubs ahead of Arsenal in the Deloitte money league are old established giants. (Real, Barcelona, Bayern & Man Utd). Between them they have won 20 EC/CL titles. Arsenal are the only club in the top five never to have won it. In the top ten on the money league they have this dubious honour along with Chelsea.
“There is a strong correlation between a clubs wage bill and on-pitch success. This year’s Money League clubs have won 43 of the 50 domestic league titles available in the ‘big five’ countries over the past ten years.” Deloitte Football Money League, 2010.
In the past ten years only one club outside the Money League top 10 has won the CL. (Porto 2004).
Another not insignificant disadvantage for English clubs is that the big European clubs generally all operate in a lower tax regime. In Spain top earners pay 43%. This 7% advantage just adds to the problems of English clubs trying to compete on players salaries. (Fabregas reportedly going to Barcelona for a smaller salary would require some closer examination!). Players and agents of course factor in the net income, with perhaps the exception of A Arshavin!
While FFP will certainly rein back the big owner-funded clubs of Man City and Chelsea, the old established giants will still remain as the principle forces to overcome. There is no question that they are all preparing for FFP and will strive to meet the requirements, albeit maximizing the rules and any grey areas such as; what is the definition of fair commercial worth? This is where the main competition lies ahead, not just with Chelsea and City. And the effectiveness of the FFP rules has recently been tested by Man City’s recent sponsorship deal, which UEFA have said they will look at closely. We all eagerly await the result of UEFA’s scrutiny!
The principle requirement of FFP is the breakeven rule. Clubs will be required to breakeven on their football activities. It is generally accepted that a good ratio of wages to revenue should be around 60%. Championship clubs voted to adopt the FFP principles and accept 60% as the maximum. UEFA recommend a maximum of no more that 70%. However, it is a break even rule which is assessed over a three year period. And, as some charges included in accounts are not assessed by UEFA, FFP is extremely difficult to predict at this early stage. For example, investment in youth structures and stadium are excluded. (But will appear in the Clubs accounts).
In the initial years clubs will be able to escape with a loss situation if these losses are covered by their owners. (If the cash injection is exchanged for shares in the club). A loss of €45m is permitted for the seasons 2012-13 & 2013-14. If owners are unable to subsidize debts, the maximum loss is €5m.
From 2014-17, the overall permitted loss will be €30m. If a club does not breakeven and under certain conditions it can exclude player contracts concluded before June 2010. Therefore attempting to predict accurately the impact of FFP at this stage is a very difficult exercise. All the money league clubs are moving to bring their finances in order and with their advantage in earning power will stay significantly ahead of Arsenal and the others. Real Madrid are still top of the money list and their commercial and TV income leaves Arsenal’s results look distinctly average.
A UEFA benchmarking report showed that only 5 out of 80 clubs would fail to reach breakeven if the rules were applied to clubs entering competition in 2010/11.
The financial problem in European football resides not primarily with clubs in the top divisions, but with clubs aspiring to reach the top division.
Stefan Szymanski. An Assessment of UEFA’s Financial Fairplay Rules, Cass Business School, City University London.
Interestingly, the same assessment identifies Liverpool, along with Chelsea and City as “being at risk” of not breaking even.
For part two, tune in tomorrow morning at 0800 sharp!