Arsenal Holdings Final Accounts – Good Progress

Arsenal Holdings plc’s final accounts for the financial year ended 31 May 2010 were released this morning ahead of the shareholder’s annual general meeting next month on Thursday 21 October. 

Generally they make good reading. We’re now in the black on property trading. All the loans taken on for the building and re-building at Highbury have been paid off early. All property sales are now pure profit (less small charges for pre-sale maintenance and security). 

Football income held up very well considering we played five fewer home games in the financial year compared to 2008/9 – £222.9 million compared to £225.1 million. The reduction in matchday receipts was compensated for by increased revenue from UEFA for our Champions League participation and the Premier League. We got £31.1 million from UEFA, up from £23.8 million, despite going out one round earlier than the previous period. This isn’t exactly like for like as the collective UEFA deal now covers the play-off round as well as the group stage onwards but is still excellent. Total broadcasting revenue was £84.6 million, up from £73.2 million. 

Retail and commercial revenue continues to be an area where we underperform compared to others, mainly due to the long term stadium naming rights (expires 2021), kit and jersey sponsorships (both expiring in 2014) with Emirates and Nike. Less home games also meant fewer royalties from caterers Delaware North and fewer sales at the Armoury and other shops at the ground. There was also a reduction in success payments from our sponsors. The final number in this area was £4.1 million down at £44 million. 

Wage costs continue to climb, from £104 million to £110.7 million, up 6.4%, getting on for twice the rise in prices (3.4%) in the year to May 2010. This number should begin to stabilise as a significant upward pressure on player salaries is curbed as the new UEFA financial fair play regulations begin to bite. The effect of the rise in the UK Pay As You Earn (PAYE) Income Tax rate for earnings over £150,000 a year to 50% should have been digested by now. It is also likely that the concessionary income tax rate in Spain for foreigners of 23% will be withdrawn as all European governments grapple with large deficits. 

There is a remaining worry about the Sterling-Euro exchange rate but the sovereign debt crisis which has afflicted Greece and, to a lesser extent, Portugal, Spain and Italy (all of which are members of the Eurozone) should curb any further drastic fall in Sterling against the Euro. All those factors should mitigate the seemingly inexorable rise in our player salary costs. 

Set against that will be the increasing impact of the new contracts signed with a number of current players. I expect the half yearly accounts to end November 2010 to show a further significant increase in salary costs. 

We also made a profit in player trading of £13.6 million, up from £2.9 million in the previous financial year. These figures don’t include the signings of Laurent Koscielny or Sébastien Squillaci or the departure of Eduardo and Jay Simpson however. There were no transfer fees involved in the arrival of Marouane Chamakh nor the departures of Mikaël Silvestre, Sol Campbell, William Gallas, Fran Mérida or Philippe Senderos. 

The only long-term debt that the club has left on the books, other than the debentures issued to supporters to help fund the re-building of Highbury and in 2003 to raise working capital, is the “mortgage” on the Grove which now stands at £239.3 million. The club repays £5.6 million a year of the “principal” and £14.6 million in interest on the sums originally borrowed for a total of £20.2 million a year. The “mortgage” is due to be paid off in 2031. Even if gates absolutely plummeted we’d still be no worse off than if we’d have stayed at Highbury so the downside is well protected.  

We took £44.1 million in matchday revenues in our last season at Highbury. There’s only been one increase in general admission ticket prices since then (in 2007/8). In the last financial year that number was £93.9 million. There has been a big increase in operating costs of course. That’s to be expected with a much bigger home ground, but the gross income increase LESS the annual “mortgage” loan repayment is £29.6 million, when compared with the last season at Highbury in 2005/6. 

So what cash is available if we want to spend it? At 31 May 2010 that number was £89.9 million of cash on hand, net of the £31.5 million our loan agreement “covenants” as they’re called are required to be kept in cash or near cash to fund the repayment of the next principal and interest payment due. We have to keep the entire next payment and half of the following repayment set aside at all times. Of that near £90 million you have to bear in mind that a lot of the club’s stadium income comes in towards the end of the previous season with Club level Platinum member season ticket and executive box renewals and those general admission Gold member season ticket renewals processed before the end of the financial year.  

Nearly half (47%) of our football income comes from matchday revenue (tickets, programmes, catering, etc). A VERY large proportion of this (well over a third) are Platinum Club season tickets and executive box income. That market is always the most fickle, especially in a recession. Whilst we do receive staged payments from the Premier League for the broadcasting contracts during the season and from matchday catering, programmes and the just over 14,000 tickets available for match by match sales we can’t go out and blow the whole near £90 million. There are other demands on that cash. We have got money available for new players, both for transfer fees and salaries if the manager wants it though. 

So, overall, not at all bad. There are two issues we need to address – commercial income and general operating costs. We all know that our current sponsorship deals were signed when we urgently needed cash in the bank to pay construction bills. Now is the time to start working on new and significantly better deals as they start to come up for renewal. On a micro level I’ve also had one report of shockingly slow service in the Club level restaurants and buffets. The club needs to work with Delaware North to resolve any such problems lively. The punters dining in Club level pay a super-premium price to do so. They’re not going to come back if they don’t get top of the line service to match the prices charged. Word soon spreads of such shoddy service. 

We also need to have a long look at our “other” operating costs. It’s difficult to make intelligent, informed comment on this area as the club has refused to provide a breakdown of this number, saying that the global figure it discloses meets its obligations under both company law and the PLUS market rules (the junior stock market upon which Arsenal Holdings plc shares are traded, formerly known as Ofex). That’s true but very unhelpful. How can shareholders and supporters make meaningful comment without the necessary information? 

It may be that the money expended (north of £50 million) can be justified. The exact number for the financial year to 31 May 2010 mysteriously isn’t included in the extract of the accounts the board has released to the market. We’ll have to wait for the full accounts to arrive in the post with shareholders to see that figure. The last thing I want is a penny wise, pound foolish approach. Equally it may be that savings can be made in this area without any cuts in quality of maintenance, safety and service. It’s impossible to tell until and if the board decides to lift the veil of secrecy. I for one think they should.  Every pound we can save on these costs with sacrificing quality is a pound more for the playing budget.

The bottom line of the accounts is an after tax retained profit of £61 million. Unusually this number is larger than the pre-tax profit. The club has resolved a number of complex tax issues with Her Majesty’s Revenue & Customs (HMRC) which means a credit from the tax man of £5 million. Hopefully the work with HMRC should also insulate us from any nasty shocks like backdated tax bills for player image rights payments and other tax avoidance wheezes. HMRC is mounting a bit of a Tax Jihad on football at the moment. 

I’d also like to see the club continue to address the issue of the number of supporters turning up in fancy dress at the Grove disguised as empty seats. The number announced for the attendance is in fact the number of tickets sold. Why not release the actual turnstile count too. The Ticket Exchange Scheme is progress. I’m pleased the club hasn’t turned to one of the legalised ticket touts like Viagogo as Manchester United and Chelsea have. The club executives need to work with supporters to make the Ticket Exchange more popular and widely used.  

Enough of the bean-counting. Time to focus on the visit of the Baggies to the Grove tomorrow. I’m still on a high from stuffing the Forces of Darkness in the Carling Cup at the Lane on Tuesday. I know it’s the lowest priority competition of the four we’re in but it was still sweet. We’ll know who we’ve got in the fourth round before kick-off tomorrow. Anybody at home will do me. 

 As the manager and players focus on three League points tomorrow lets all enjoy the afterglow of last Tuesday night’s win. There is a YouTube video clip doing the rounds at the moment of an animation of a fictional conversation between a Gooner and a Spud which brought tears of laughter to my eyes. If you don’t like bad language it’s not for you. I wouldn’t play it at work as you could well end up with the sack but I thought it was very, very funny: 

http://www.youtube.com/watch?v=utUyha0wjSE 

Keep the faith! 

vic@arsenalinsider.com

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Vic Crescit

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