Business is business… but are we now more at risk of takeover? This is the question that the set of financial results recently published may give rise to. I base this upon the need to balance the pressures of expectation from our fanbase and players with the harsh reality of a squeeze on the hard cash available to develop our playing squad.
I hinted in an earlier posting (Watch this space.) on the financial results to end May 2008 from Arsenal Holdings plc published on 19/9/2008, that there were aspects of the report that gave rise to concerns. I shall now detail the most obvious ones. I stress that it should be said from the outset, that I am not a financial expert, and I will bow to the expertise of any accountants, company finance directors etc who share my love of the Arsenal. All I have done is applied simple logic to the facts that I see presented, and I would like to stimulate a debate.
Stan Kroenke’s appointment to the Board.
I am pleased that the Board has seen fit to welcome another major shareholder onto the board. However my main concern relates to the strategy being employed here and whether it might in fact backfire. Making enemies of your largest shareholder (Alisher Usmanov) is probably not a good idea in the current economic climate, if only purely on the grounds of wanting to be seen to be even handed in any dealings with shareholders.
Shareholders rights are no doubt contained in some articles or clauses of the instruments governing company practices, and no-one can take away the considerable voting power that is possessed by Alisher Usmanov. However I just question what harm is being done by not having a representative of the largest shareholder on the board, now that Stanley Kroenke has been brought into the inner sanctum. It just seems like waving a very large red flag at a potentially more powerful bull.
That aside, I recall welcoming the suggested invitation of Stanley Kroenke onto the Board earlier this year with reservations. My reservations not only remain but have been reinforced by the position taken by Mr Kroenke. I recall saying in not so many words that whilst we as Arsenal fans should oppose Alisher Usmanov, in principle we should also oppose any aspirations that Stanley Kroenke would have in buying the club.
The main difference being that Stanley Kroenke appears to arrange buying franchises after much consideration with the long game being adopted. Hence I believe the nickname of “Silent Stan” The choice was stark, between the devil and the deep blue sea, as both options would see the club saddled with a potentially crippling debt to repay. Plus then the club would become a rich man’s play thing to be traded once the novelty had worn off.
Imagine my surprise therefore to read that Stanley Kroenke with almost 13% of Arsenal Shares is coming onto the Board but has not signed the Lock down agreement. I had heard that he had reservations about the agreement, but why has he been allowed to sit at the high table without this agreement in place? This is ringing alarm bells in my head. The obvious fear I have is that Stanley Kroenke’s shares remain on the market to the highest bidder, should he feel the need to realise the cash invested in his holding.
This represents a major threat to the club in my final analysis, as it undermines the confidence that I initially had in the suggested appointment of Mr Kroenke to the Board. My reasoning was simple, having the majority of shares locked down until 2012 would mean that no-one could buy the club outright, assuming that the lockdown agreement could stand the test of a legal challenge. I can only surmise that certain reassurances were given to the Board, a kind of gentleman’s agreement lets say.
It may be that Mr Kroenke will seek amendments to the agreement and then once happy his signature will follow. Either way this option was not signalled in the Chairman’s report so I cannot say if this is the case. I am sure that if Stanley Kroenke gave his word, then this will be good enough for the members of the Board, but when push comes to shove, “Business is business”
Highbury Estates losses
One of the problems with the construction and estates sector at the moment is the stagnation caused by the credit crunch. Put simply, if no one can get a mortgage to buy a “Bijou des res” then it unlikely that the remaining apartments will be sold anytime soon. It was bold to state in the report that “to date..” Arsenal’s estates business had not been affected by the credit crunch, but then present figures showing continual losses and what appears to be projected “downsizing” of any expected profits. The burden of increased loans coupled with expected losses on the sales is a significant threat that despite the ring fencing of that particular business.
You may recall that the gamble of creating an estates side of the business was to be a vehicle to enable the club to rapidly reduce the amount of debt owed by the club not to increase it. Figures of £100 million being realised were mentioned. Of course it is not the club’s fault that the economic climate had changed resulting in a failure to sell all of the apartments. It does not seem likely that we reach a situation where all 680 units will be sold, no matter how aggressive the marketing. The numbers of exchanged contracts is also a cause for concern being lower than the number of units the club claimed to have “sold”. the challenge is how we now manage these expected losses.
I repeat that I am neither a financial expert or property mogul, and these are just simple logical deductions from the facts presented. The shortfall in expected profits from this business might mean that costs on the estates side may be subsidised by the football club thus reducing overall turnover, or have I got this wrong? This is to my mind a very risky scenario given the need to develop the Queensland Road site and the likely costs involved, but the credit crunch could never have been predicted by the club and they cannot be held responsible for this state of affairs. It just makes us more vulnerable financially.
The Increased wages bill
My other concern relates to the suggestion by the Arsenal Supporters trust that somehow spending over 100 million (up from 89.7 million) on wages has “competed for and rewarded the best players” We have a very young squad, and if our wage bill is this high, then there must be some very handsomely paid teenagers in our ranks. This is based upon the fact that Arsene Wenger operates an egalitarian wages structure, that sees no player being paid excessively more than one of his colleagues. The new players coming in have been either very young or free agents. Good deals maybe, but not ready made world class experienced players at their peak.
My main concern is that logically, we must sell to buy, and therefore in much the same way as Manchester United, the financial situation is that if Real Madrid or Manchester City came in for Cesc Fabregas, I suppose the Board may now feel more inclined to consider such offers in order to reduce the debts. I remain of the view that selling our best players is not the route to success. We should be trying to add to our squad and achieve that difficult balance between youth and experience. So logically our wage bill should have been higher (by buying Gareth Barry?) in the short term in order to secure our futures on the field of play. I know that I am out of step with a significant number of gooners on this point.
The alternative is of course that the wages bill could have been even higher had we bought in ready made replacements with big salaries to match. The advantage of doing things this way is that with the credit crunch, the TV revenues may well not keep pace with the current rate of growth in future deals to be negotiated. The prospect of higher salaries will diminish and common sense may return to the transfer market. Our wages to turnover ratio continues to indicate that the Club is very well run.
I have avoided quoting numbers that would put people to sleep and the figures can be viewed here. I have tried to understand the issues that arise from this set of results. Arsenal remain well managed and quite wealthy in real terms. I am disappointed at the significant increase in our debt due to the increased costs/losses from the building/estates business. I conclude that the club is not as completely isolated from the estates division in the way that we had envisaged. The high occupancy of the stadium ensures that we can settle our interest payments on the outstanding loans. However, if success fails to come to the club, then we may lose our best players and not have the funds to replace them.
I am concerned that our increase in profitability has come predominantly from the media revenues rather than hard merchandising. The broadcasting revenues are not constant and vary dependent upon the length of cup runs or involvement in the later stages of the Champions League. It would seem that in order to prevent having to sell more players, we must have sustainable presence in the Champions League as it will serve as an additional draw to attract good players to the club, as well as retaining those already at the club.
The appointment of Stanley Kroenke to the Board without him being a signatory to the lockdown agreement is of major concern to me, and I would have insisted upon this being a requirement for a seat on the Board. I am also concerned that the largest Shareholder may be provoked by this action, and I am unclear what harm an Alisher Usmanov representative could do if they had a seat on the Board.
Arsene Wenger’s contribution to the viability of this club cannot be understated, and we collectively owe him an enormous debt of gratitude, in that we have never fallen out of the top four clubs, despite not spending excessive amounts of money on star names. I am hoping that the appointment of the CEO will enable us to expand our merchandising presence in the Far East and bring in higher revenue streams. It is crucial that the new CEO supports Arsene Wenger and will firmly bat away any predatory attempts to secure our best players.
I also suspect that Arsene Wenger will not renew his contract with the club come 2010 and may well express the view that he has taken Arsenal as far as he can, and that he leaves the club in a better shape that when he arrived having amassed seven major honours. Arsene Wenger has been the main draw to the influx of highly talented young players, who see the opportunity to play regularly at a quality club. The challenge is keeping hold of them, and therefore the increase in the wages bill may be a reflection of this reality.
So a good set of results with some reservations about the risks contained within them for the future. Some of these risks could not have been predicted, so you should not read my expression of concern as a criticism, merely a warning against complacency. My final fear is that the alienation of Usmanov in such a public way without the security of an enhanced lock down agreement represents the biggest threat to our independence and may serve only to incite a hostile takeover bid.
The mounting uncertainties about the Estates business and the likely losses to follow means that without a big expansion of our product brand abroad, revenue growth will stagnate and we will become an increasingly attractive proposition for takeover by someone with pockets deep enough to give Mr Kroenke and Mr Usmanov the pay off that they may find irresistible. (Arabs + Dein???) The decision to create and manage an estates division at the time looked like a win-win situation until the world economic down turn coupled with the credit crunch arrived this year. Could this have been a gamble too far?
Fabregas the King.