Arsene Wenger’s recent outburst about banning clubs with a large deficit from UEFA competitions would end the super club status so coveted of Billionaire owners. This scenario would amount to a cap on transfer fees and excessive wage demands. Clubs would have to spend only what they earned, and if they exceeded a percentage limit as defined by the associations, then they would forfeit the right to play in Europe. This would be the solution to the unfair situation where the best players are attracted to the leagues that will pay them the most.
The problem with Arsene’s model and that favoured by his countryman President Platini of UEFA, is that it is flawed. Not only would it be seen as sour grapes from the club that had never won the Champions League in it’s history, it would also open the door to many other daft pieces of regulation that the courts would have fun in driving a coach and horses through. Cancel concerns about The Bosman and Webster clauses, and bring in concerns about The Wenger or Platini Clause. Let me explain further. The lawyers would have a field day demonstrating that Arsenal’s wage to turnover ratio of prudent cost management was secondary to the amount of debt repayable, some 360 millions due to the cost of building our Emirates Stadium. A deficit is a debt, and to focus purely upon debts incurred by the selling and buying of players, would leave Arsenal having to defend criticism based on semantics.
A deficit is strictly defined as an excess of expenditure over revenue. Put even more simply, it is a state where money is owed to someone or something by spending more than you receive. (E.g If I give you ten dollars to spend and you end up spending 15$, you have created a deficit of 5$, that is owed to me.) However those of you who have not yet fallen asleep at thought of this being an economic or maths lesson, will be asking, where did that extra 5$ come from? Well the answer is the solution to the problem that Arsene Wenger is seeking to remove.
In my oversimplified analogy, a simple credit card enabled you to create that deficit, owed to the finance company or bank, or you may have asked me for an extra advance of 5$ so that you could make that purchase. Either way you OWE someone that 5$, and until you pay it back, you could be asked to pay interest on that deficit. Now imagine the situation in every club in UEFA, made up of European associations. Some associations, (French and German) the financial deficits are either not allowed or strictly controlled.
The debt is mainly carried by Banks or financial investment syndicates and with the credit crunch and down turn in the world economy, Football will now have to get it’s house in order, as the banks will be saying NO to further excessive borrowing. Why? Because the value of property in the UK has fallen also, and the cost of redevelopment has risen. So collateral values in terms of property will also have fallen, thus weakening any financial guarantees on bank loans. Precisely the problem that Arsenal has been having with it’s Queens Street plans.
The situation in our Premier League, is that the majority of it’s members carry deficits. Deloitte provided details of the financial status of clubs earlier this year, Deloitte reviewed the cost management of the Premier League and indicated the wages to turnover ratio of the clubs and how it had risen over the last few years. This ratio is derived from taking the wages bill and dividing it by the turnover(Income for the year) then multiplying the result by 100. For instance, a wage bill of £100 million at a club with a turnover of £200 million would create a ratio of 100/200 or 0.5, multiplied by 100 gives a ratio of 50%. Increase that wage bill by £50 million and the ratio rises to 150/200 or 0.75 = 75%
In this review the top four clubs had predictable states of finance. Only Chelsea could be said to have a buy out clause. This being if Roman Abromovich decided to write off his debts and not call them in. Then Chelsea would only be left with having to service it’s debt mountain of excessively over paid player contracts. Those alone would make the Leeds United scenario look positively healthy as no other football club would buy those players on stratospheric contracts of near £200K per week.
Take the time to read this analysis and you will see that Arsenal is rated very highly in terms of financial prudence, it’s assets are good and it’s profits will only be taken over by Manchester United, who themselves will see that profit swallowed up by the accelerating interest debts that are not being repaid in full, unlike those of the Arsenal. To make deficits of your interest deficit payments is very expensive and the costs are where the lending institutions make their money. For ordinary people like you or I, read unauthorised overdraft charges.
For the Premier league as a whole, the wage to turnover ratios have risen from 48% ten years ago to 63% in 2006/7. A staggering increase which is not sustainable in today’s economic climate. The need to get results during football matches coupled with the rising ticket prices will drive away ordinary fans who will not accept boring football at excessive prices. Football is entertainment as well as a religion, and the spiritual followers have always been in the minority. Even TV companies will find it hard to fund increases in deals with the Premier League as European Football becomes more popular.
I started this blog by stating that Arsenal was paying the price in the transfer market for trying to be the conscience of the Premier League. This is of particular interest with the proximity of the closing of the transfer window, and also it goes some way to helping our own Arsene Hollis in the dilemma that he commented upon in the blog entitled “The Arsenal Stadium Mystery” in explaining this I need to take you back to my blog the “Riddle of the missing millions” where I said…
So we cannot afford the likes of David Villa, because that would consume most of our budget for players, especially if Villa costs 20 million+. The half yearly profits announced in February this year shows an increase in pre tax profits of 8 million pounds to 20 millions. HOWEVER the net debt seems to have increased from 268 millions to 307 millions due to the Building estates division of Arsenal PLC. So the riddle of the missing millions is solved… 39 million pounds of losses have been incurred with the Highbury development project so that appears to be the reason why Arsene cannot spend big this summer.
There you have the truth and we the fans are receiving the spin. I predict that any increase in the turnover of this club will be modest this year, and most of it accounted for by the reduction in the wage bill and the selling of players. You won’t have long to wait and see if this prediction is right. Every increase in wage demands by our players holds this clu b to ransom. Merely stating that our revenues are large enough to enable us to fund interest payments on our debts, does not mean that the remaining capital is available for player transfers.
Player transfer deals are not paid for up front, they are paid by instalments (Registration Amortisation), it is the player wage bills that have to be settled and the fees due to agents and the like. Pay Emmanuel Adebayor double his wages, and you will have increased the wage bill by £2 million per year at a stroke (assuming a final 80k per week). This years accounts will help us to understand a little more how much the players are being paid. The club love to boast to that our wages bill is comparable to that of Man Utd’s but omit to point out that this figure of near £90 million includes Players and all other staff.
I will return to that topic when the Accounts are published. In this year’s accounts yet to be published, I predict that the wage bill will have gained from two or three key areas, the loss of the Thierry Henry wages deal in the final year of his contract, and more recently the ability to pay Southampton less for Theo Walcott, by a quick cash settlement, as well as the increase in player loan activity. The increases in improved player contracts may be offset by other unknown factors, which could see the wage bill remaining at least the same in real terms, or hopefully lower.
Any increase in the wage bills of around 5% will be in keeping with the 55% wages to turnover ratio defined by Deloitte as a well managed football business. (Assuming that it follows the rate of inflation in the economy.) It is not the Emirates Stadium alone that is a drain on the manager’s transfer and wages budget, it is the entire Highbury Estates division that continues to consume costs and lose value as properties remain unsold and mortgages become less available.
The Emirates Stadium occupancy is the key to future viability, or to put it bluntly, “bums on seats”. If the stadium falls to 40% full we will go into financial meltdown. A situation that the club has rightly predicted will never happen, given the size of the waiting lists. In the meantime, fans are the cash cows of this football farm. They will be milked as much as possible and they represent the real possibility for growth in future revenues.
So expect to pay more for merchandise made cheaply in the far East, pay more for video clips and wallpapers for your mobile phones and of course, as we have done this season, pay more for your season tickets. But even all that milking will not pay for a David Villa. So if we do buy anyone in the remaining 24 hours of this transfer window, we can confidently predict that the cost of the player will not exceed £20 million. Which rules out several contenders.
Here lies the frustration of many Arsenal fans, who see the introduction of youth on cheap contracts financially at the expense of more experienced players. The facts as we can see with the evidence of our own eyes and ears is that Wenger either brings in untested youth and plays them at the senior level, or he brings in players past their peak. Look at the transfers of Coquelin, Bischoff and most recently Silvestre. I believe that much of the anger being directed towards the club at the moment, is that most fans have now had enough of Arsene Wenger never buying a player at the peak of their career, with the additional contractual costs that would be incurred. In fairness to Arsene Wenger, the failure to bring Alonso to the club has as much to do with the failure of Liverpool to agree terms with Aston Villa for Gareth Barry.
Contrast that with the exact opposite being employed in the Boardroom, where Keith Edelman can receive a million pounds for staying on a year as consultant to the New Managing Director. If as I predicted in June, David Mcnally ex supremo of Fulham joins in December of this year, you can be assured that he will be paid the market rates as far as the Boardroom is concerned. Yet as I have already pointed out, the most important asset to this club, is not the Boardroom policy or directors, it is the team on the pitch.
In closing, my own view for what it is worth, is that Arsene Wenger will not buy Alonso or Veloso or Inler for that matter. In fact if he does buy another player (and I believe that he will not), he will be forced to buy yet another unknown of lesser value than say Gareth Barry at £18 million, because whether Danny Fiszman agrees or not, we simply cannot afford to spend that kind of sum, because by so doing we would be breaking our own rules having established ourselves as the official Premier League conscience… Oh do I hope to be proven wrong in the next hours remaining of this transfer window!
Fabregas the King.