Arsenal: An Oasis Of Fiscal Sanity In An Orgy Of Excess – Part III
ByAs this article series has evolved over the last two days, I’ve had to divide this final instalment into two, the first of which appears today, with the second to follow tomorrow.
You can read:
Part I of Arsenal: An Oasis Of Fiscal Sanity In An Orgy Of Excess
Part II of Arsenal: An Oasis Of Fiscal Sanity In An Orgy Of Excess
*** Update (20/03/2010) ***
Commenting on this instalment of this article series, readers “Ken Hendrickson” and “ClockEndRider” found the Forbes presentation of debt to be non-intuitive. In hindsight, they’re right. So here is a link to an article that lays out the numbers in a far more straightforward
format: http://tinyurl.com/y9ot3nl
- £727m Manchester United
- £609m Real Madrid (Real claim only £296m)
- £436m Barcelona
- £386m Internazionale
- £348m AC Milan
- £297.7m Arsenal
- £240m approx Liverpool
- £147m Juventus
- £136m Roma
- £96m Bayern Munich
- £0 Chelsea, after £340m write-off, announced Dec 2009
- £0 Man City, after £305m debt-to-equity write-off, announced Jan 2010
The key point to note is this (extract from the article linked to) :
Debt in English football has been highlighted again because United’s new financial figures, released last week, showed they made an annual profit of £48.2m only thanks to the £80m summer sale of Cristiano Ronaldo.
United paid £41.9m in interest in the year on debts that are now above £700m. Chelsea’s most recent figures showed a £44.4m loss, while City’s showed they lost £92m. Both those clubs’ owners have wiped out debts in excess of £300m to clean up their balance sheets.
Liverpool’s debts are £240m-plus. Arsenal have £297m of debt, but this was acquired mainly for building Emirates stadium, now a cash cow that helps fuel profits. Arsenal’s repayments are easily serviced.
My own comments: Bayern is the only other club, apart from Arsenal, on that list to have borrowed to take ownership of the Allianz arena; again a case of debt financing an asset that pays for itself as it were.
No other club on that list can point to recent revenue generating assets financed with their debts, something that highlights the prudence of both Bayern and Arsenal.
***end of update ***
Over the two prior instalments, we’ve seen how the plc model is vulnerable to Leveraged Buyouts by those seeking quick turnaround on their money, and how the membership model doesn’t necessarily protect a club from the elected management’s adventurism either.
In today’s column, we’ll look at the various ideas taking root in the protest movements by the fans, and at the interest UEFA has shown in curbing debt, to understand how sound and sufficient they are, and what ideas are worth exploring to better protect fan interest in the clubs.
Let’s be clear about what we’re aiming at here too. The objective is not to eradicate debt or excess from the game, but to give fans a chance to curb both.
If given the opportunity, they choose to go with excess, they shall face the consequences, and will not have recourse to pleading powerlessness.
Recent events at Notts county underlie the view expressed above.
Tuesday, 30 June 2009: Notts County’s Supporters Trust have voted overwhelmingly in support of the takeover by Middle Eastern consortium Munto Finance Ltd.
12 Feb 2010: Ray Trew, the businessman who assumed control of County for £1 from former chairman Peter Trembling, has sent in a team of five accountants, who spent the day combing through computer documents, looking for discarded invoices in their attempt to unravel the mess left behind by Munto Finance and gauge the financial turmoil at the club.
The consolation is that the trust, with a 60% share holding, had a say in the matter. It is giving the fans the chance to salvage their situation, or prevent a mess, that I think is necessary.
The most pernicious consequence of the leveraged or tycoon takeover of the Premier League, to my mind, is the possible reluctance of sober, long term oriented capital to enter the business. who in their right mind would want to compete with the recklessness of those playing for a quick turnaround on the back of perilous debts, or of tycoons motivated by who knows what?
That it is possible to realize a steady if not spectacular profit in the game consistently is clear; as illustrated by Arsenal and Bayern Munich.
In this table
, you’ll find clubs sorted by different variables. Click to sort the table by the debt/value column, and you’ll see that both the clubs, clearly belonging in the big league, aren’t crippled by debt.
It’s not that either are perfect; it is that both, as a consequence of reasonable debt levels, have a sufficient margin of safety to recover from the inevitable errors inherent to business.
It is clear, therefore, that football can be a worthwhile business when run soberly and with an eye on the longer term. What is necessary is to put in a structure that for the most part, is attractive only to such owners, and allows fans to have a say in the way the clubs are run.
In the light of that conclusion, Michel Platini’s initiative to deny participation to the unviably indebted is welcome, but not sufficient.
Two outcomes are possible: Clubs break away and form their own “Super League”, or recruit financial wizards to game the system and hide debts “off balance sheet” through various mechanisms.
It’ll then become an all too familiar game of regulators playing “catch up” while crises beset us in the interim. This entire “credit crisis” the world’s dealing with is the perfect illustration of this behaviour, as illustrated by the following links:
First, within football itself – http://tinyurl.com/yzg8tfk, because as long as the holding companies are servicing any debt on the loans that have been taken out by the owner, it is perfectly possible for clubs to break even or even record a profit.
For example, last year, Liverpool actually made an operating profit of £10.2 million, even though Tom Hicks and George Gillett paid interest of £36.5 million, contributing to a holding company loss of £42.6 million.
The problem is that the holding company debt, to greater or lesser extent, will be secured against the club’s assets. In the event of bankruptcy, creditors will land on the club eventually.
From the larger world, just to highlight the prevalence of the games:
did Lehman Brothers Holding Inc (LEHMQ.PK) cross a line in the routine manipulation of its balance sheet, as described by an independent examiner?
That is the central question to emerge from the examiner’s report, released late on Thursday by the bankruptcy court in Manhattan, which details examples of Lehman concealing assets and liabilities through accounting techniques.
Goldman Sachs, the giant investment bank, is today at the centre of the row over the Greek government’s finances, amid recriminations over complex financial deals that allowed the euro zone nation to skirt its debt limits.
I’d also like to express my dislike of a NFL type structure.
In summary this is a permanent roster of clubs with no relegation or promotion, with wage caps, a rotation system that allows the worst team to recruit the top player for the coming season to ensure some form of equalization, and restrictions against leveraged buyouts.
This structure, the delight of pseudo free marketers everywhere, is called an oligopoly. ‘We all agree not to rock the boat so we all may benefit’ is the motto.
The only winners in this structure are the equity holders themselves. They get a fatter share of the profits pie at the expense of the wage capped players.
You don’t have to be Marxian to see the injustice of this. Players should enjoy the possibility of variable reward for skill and application. The same
applies to teams not part of this privileged league: Relegation and
Promotion, as we know it in the Premiership, are great motivators. Why
on earth shouldn’t clubs in the Championship not have the prize of promotion, with the attendant financial rewards and higher profile, to aspire for and play towards?
Moreover, capping wages would be treating the symptom and not the disease itself. It isn’t the wages, but the fact that they are driven higher, on the back of debt, or an owner’s personal wealth, in a mad hunt for a quick buck, or glory, that’s the problem. We should be careful to separate cause and consequence here.
I hope, on this evidence, that we can agree about UEFA endeavours to be necessary but not necessarily sufficient to curb gambling by football management.
Having explored the limits of the punitive measures, we shall take a look in tomorrow’s final instalment at preventive measures, which in essence allow fans to say no right at the outset, to the more reckless ideas of management.
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Tue 13th September 2011; 19:45, Dortmund
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Saloner,
Recent reader of the blog, which is generally of the highest quality. This has been a great series so far. I agree that there are benefits to having a PLC/Membership model that allows fans/members an opportunity to provide input on the direction and management of “their” club.
However, I think that there is another side to this story that needs to be at least mentioned, if not explored. The problem I see with providing members an opportunity to reign in the excesses of leveraged buy-out owners and crazed management is that there is no reason to believe that fans/members will actually ever be a force for “sober second thought”. On the contrary, it is most often the fan base who are clamouring for new expensive signings. How many people at the beginning of the season this year bemoaned the failure to sign a 12 million Chamakh or a 20 million Melo? Fans, generally, are even more likely to be short-sighted in their goals for the club and the least informed about the market conditions that prevail or what a player is actually “worth”. Rather than control spending, fans and members are likely to encourage it and put pressure on the management to spend lavishly. That is what has happened at Real Madrid, for example.
When the spending fails, because real life is not Football Manager, fans and membership have an easy out – they can support another club. That would make them not real fans, but the modern world is rife with supporters who come and go depending on on-field success. That leaves the loyal fans and management to clean up the mess. It is no consolation to say “well, you made your bed, so lie in it”.
Instead, the model that seems to me to be the best for restraint is to have financial wisdom and foresight in the management level. People who are brought in not only because of their sports acumen, but because of their financial abilities. Arsenal and Bayern have this in common. A manager who has both football sense and an understanding of economics. Board members who understand the long-term vision required and can withstand the pressure of fan and player demands alike. These are the experts who run the club, and they are the best and most effective source of ensuring fiscal control.
Cheers,
Jon
Exquisite, Saloner. I’ll eagerly await the final part. However, I believe that Jon have a valid point up there. Fans by and large, cannot be relied upon to be the voice of reasoning in curbing excess spending on overated players. We Arsenal fans witnessed it at the beginning of the season as well as in January, when some fans nearly went up in arms about buy everybody under the Sun. They were simply doing the hynotic biddings of a certain Usmanov.
Typo error: “about buying” *** “hypnotic”
Jon, LRV: Your doubts regarding fan sobreity are sound. Indeed, I highlighted the Notts County example precisely to illustrate this.
That said, I look at it as democracy being the best of the bad options on offer. While proactively sober managements are ideal, they are a rarity in practice. Hence the need for restraining regulation and voices.
Today, supporters simply are mute witnesses to the actions of management. I think giving them a voice and a vote will be an improvement on the situation not because all of them will exercise them wisely, but that those who wish to will have an option.
To paraphrase the premise behind our justice system: May a hundred supporter groups waste their voice, not a single group that uses to exercise it wisely should be denied the choice.
That’s my take.
Let’s not forget either that supporters have a powerful weapon at their disposal: Refusal to attend games.
I’m surprised the Green & Gold movement hasn’t resorted to that measure as a protest. Given that they have a set of seemingly sensible investors waiting in the wings, there’s no danger of destroying the club by resorting to this either.
But that’s previewing tomorrow’s post. I’ll leave it at that for now.
Your link to http://www.forbes.com/lists/2009/34/soccer-values-09_Soccer-Team-Valuations_DOV.html shows Arsenal with a Debt/Value ratio of 107, the worst in the table. It’s not entirely clear how that figure has been arrived at mind you, the recent announcement was of a cut in “total net debt from 332.8 million pounds a year ago to 203.6 million pounds.” (http://uk.reuters.com/article/idUKTRE61P24220100226)
And I thought Chelsea’s debts had all been paid off when Abramovitch converted all his lavished millions into shares.
Best wishes, Ken.
Well, I can’t argue with that, Saloner. At least our own Arsenal Supporters’ Trust has a voice, albeit a small one. I’ll look forward to the final part tomorrow.
Ken,
The Forbes values state at footnote 2 that these figures include stadium debt. Stadium debts are a special kind of debt, because unlike money spent on players or wages or marketing, stadium debt produces an asset – the stadium itself – which both secures the debt, and more importantly, secures the best source of revenue – matchday receipts.
Many financial reporting mechanisms exclude stadium debt for this reason in a team’s financials, provided that the debts on the stadium are being serviced.
In fact, the increased revenue generated by The Emirates is virtually solely responsible for Arsenal’s consistent climb up the value table, now valued at third on that chart. We’re climbing in the Deloitte Money League as well.
If you take out the stadium debt, Arsenal are in fact not in debt at all. When the Emirates is paid off, our debt ratio will be zero, with a profit in the 30 – 60 million a year range, at current success and growth levels.
Chelsea’s debt is only “gone” in the sense that generally accounting doesn’t call it debt. But it’s still there, in the sense that if someone wants to come and buy Mr. Abramovich’s shares (ie, wants to buy the club), they have to pay the 700 million value that he will claim, which was the value of the loans in the first place. It will get them over the UEFA rules, but it won’t get them to a stable financial position.
Saloner – thanks for the response. It’s great to have a real informed back-and-forth! I am all for more participation in the club by fans, even if they do not exercise that voice wisely, principally for the reason that football clubs hold a special personal and cultural significance that separates them from any other corporate property.
I just think that the reason why Arsenal is an “Oasis of Fiscal Sanity in an Orgy of Excess” is owing to Wenger and the Board. Giving the fans a say won’t change that, and probably would work counter to our sound policies. It is the ability of Wenger and the Board to stand fast to our principles, footballing and financial, against the wash and tides of media, fan, and peer criticism that has seen us navigate to the fair financial waters we now sail.
We should be a beacon to other clubs. Not their fans, but their management, who should point to our management policies and say – if the Hulls, West Hams, Portsmouths, and Sunderlands of the world want to build a sustainably successful club, then that is how we do it. It will take patience and faith and time and it will be long and painful. But it will work. The Manchester City model will fail.
Cheers,
Jon
Saloner-
This is a terrific set of articles, and I’m definitely looking forward to tomorrow’s conclusion. Jon beat me to the punch regarding fan representation though; most football fans are hopelessly ill informed, and while well meaning, they only wish for success rather than success through financial stability. That said, giving a registered fan organization a seat on the board (possibly non-voting), would increase transparency into club operations, so that fans can understand why the club is making the decision it is making. Plus you never know- they may have good ideas themselves!
While responsible management is the best route toward stability (as shown by Arsenal and Bayern), unfortunately, I feel that tough economic sanctions by FIFA and UEFA are the only way progress will be made. Since most manager’s are only at a club for a few years at most, their success is usually shown by trophy’s rather than the income statement and balance sheet, so there is a strong incentive to strengthen the team more than fiscal responsibility allows. This leads to a vicious cycle where clubs need to strength simply to keep pace with others, which only further exacerbates the problem by inflating transfer values. To combat this, I favour the idea of needed to post a positive net income to play Champion’s League football, but as anyone who has studyied accounting knows, posting a net profit and actually making money is far from being the same thing. The only solution I can think of is a standardized checklist of major sources of revenue and expense to determine a clubs profitability. It would be difficult to quantify, especially due to factors such as Roman’s ‘shares’, but you get the idea.
You should not be able to buy a trophy, end of story.
Cheers,
Shawn
Oh, I realize that my description for a standardized checklist sounds a lot like the income statement- I am thinking of something like core net income, or operating net income, etc.
Excellent series of articles. The grass roots supporters movements that are springing up in the light of the current financial crisis are a very interesting development. I am also surprised at how meek the green and gold movement are, and it makes me makes me a bit suspicious that the whole thing is being orchestrated by the red knights group who want to buy the glazers out. The fans need to realise what power they have. refusal to attend games and refusal to renew season tickets is a powerful veto to have over the current board.
I also agree that fans should be given (or indeed should seize for themselves) control of the board of their clubs. Yes, many fans are currently not particularly qualified to make educated decisions on the management of the club, but over time and through education and experience, there is no reason why this skill and knowledge cannot be developed, and in fact the football club itself should be the organ of this education. a football club has the potential to be a whole lot more than just an entertainment/diversion – it could be an organ of real social change if managed for the people and not for the profit of a few shareholders. Also, if all fans/shareholders are brought into the decision making process (which is getting easier all the time with advances in communications) then i would trust that the most intelligent and coherent arguments should come to the fore.
It all comes down to whether you trust people (i.e. the masses) or not. real democracy demands that you do. it’s time for fans to take the power back!
Ken, Jon has beaten me to the punch with an even more coherent response than I’d have been capable of. I hope the logic is clear to you now. I’m sorry I didn’t elaborate and took the footnote to be explanation enough.
Jon: Thanks for explaining the issue to Ken. As for the possibility of supporters getting in the way of sensible management, well, we are lucky to be run by Arsene Wenger (Though I hope he hires a great defense and goal keeping coach this summer), and a sane board. Both, you’ll agree, are rarities in football. We ourselves haven’t always been as lucky in the past, and it is a legitimate concern to wonder if we will always be as lucky. I’m perforce, thinking of football as a whole here; yes, supporter power doesn’t come risk free, but on net, I think it will be an improvement over today’s California Gold Rush.
Shawn: You’re spot in pointing out the vulnerability of “Profits” to creative accounting. There are a lot of people at The City, who having taken the banking system to the cleaners, have time on their hands to help out football owners in this regard.
Andy: I agree with you that the opportunity, and dire necessity, to immunize football against predatory capitalism is nigh. Fans must band together and make the most of the opportunity.
Thank you guys for taking the time to discuss the issue. It encourages us bloggers.
Jon/Saloner,
I think Ken’s point is not that we don’t have debt but rathger that he can’t understand how the ratio os computed to be 107%. I must say that I agree with him. Any clues?
Ken Hendrickson; ClockEndRider:
Here’s how the 107% is computed (All Values in Dollars) :
What Forbes computes as the value of the club is arrived at by estimating earnings growth that’ll be generated in the foreseeable future by our assets and valuing the assets on that basis.
Forbes reports Arsenal’s value as being $ 1.2 Billion. Now, suppose someone agrees with that valuation and buys the club, with cash, for $ 1.2 Billion. Just over $ 600 million of that money – the value in dollars of the debt as on that date – will go to the banks who’ve lent money to us. The rest, just under 600 million will accrue to the current shareholders.
What Forbes calls “Debt/Value” is best understood as being “Debt/ Equity Value”.
That’d be (A Little over $600m)/(A Little under $600m) computing to a value of 1.something; in this case 1.07, which in percentage terms is 107%.
I hope that clarifies the thing?
Note that the numbers I’ve used are approximate. I haven’t had the time to compute the exact values, using exchange rates prevalent at the time the article was published. The numbers are close enough approximations for our purposes however.
But I hope I have clarified the intuition and the methodology behind those computations.