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Arsenal - making money from football

Abstract
The economics of football are relatively simple so football is a good study if we are learning
accounting, and the first subject of this case study.is how well do the financial statements of a
football club describe what is going on?
Football is a famously difficult business to make money in. Football revenues are burgeoning, but
the money mostly finishes up in the pockets of the players. As a result, many of the worlds top
football clubs lose money, and very few earn what would normally be considered a decent return for
investors. Arsenal has been an exception. It had no choice it was a public company listed on a
stock market and lacked a rich owner with deep pockets. So the second subject of this case study is
whether, and how, Arsenal managed to make money from football.

This case was prepared by Professor Chris Higson with assistance from Julie Conder. The case study
was prepared in 2014 from publicly available information, as a basis for class discussion rather than to
illustrate either the effective or ineffective handling of an administrative situation.
Copyright 2014. All rights reserved. No part of this case study may be reproduced, stored in a
retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying,
recording or otherwise without written permission.

Football's economic model


In financial terms, football looks like a simple business, even at the top level. You need a stadium to
play in, and a training ground. You need a squad of perhaps fifty players and a few hundred other
people to coach and manage the team, care for the ground and run the business. Your revenue has
three components: matchday revenues, broadcasting revenues, and commercialisation. Matchday
revenues ticket sales and hospitality are the traditional source of a sports clubs income. The big
football clubs now share in the proceeds from global broadcasting rights. They commercialise their
media profile to build a global brand and to profit from selling merchandise like replica shirts, selling
sponsorship deals to companies that want to be associated themselves with the brand, and so forth.
Table 1 reports the 2013 revenues of the world's ten biggest clubs; the data are taken from the annual
football survey by Deloitte. In 2013, Real Madrid was the biggest by some margin, with Arsenal in
eighth place.

Table 1 The largest clubs in 2013, in terms of revenue (figures in m)

Real Madrid
FC Barcelona
Bayern Munich
Manchester United
Paris Saint-Germain

518.9
482.6
431.2
423.8
398.8

Manchester City
Chelsea
Arsenal
Juventus
AC Milan

316.2
303.4
284.3
272.4
263.5

Source: Deloitte 2014 Football Money League

The big football clubs have seen big increases in all three sources of revenue matchday,
broadcasting, and commercialisation in recent years. But most of this finished up in the pockets of
the players and what did not go on wages went on transfer fees. The overwhelming imperative for any
top football club is to stay at the top, so the surplus earned in a good year was likely to be immediately
earmarked for acquiring more talent. Top football stars may be paid 10m a year or more. These
people possess unique talents and are immensely valuable intangible assets to the clubs they play
for, so there is intense international competition for their services. The puzzle is the wages of the
players below that level; the journeyman players. In the English Premiership, most or all of the players
earn 1m a year or more, and around 70% of revenues go on player wages. In the English
Championship, which is the second-tier league, that number is over 100%.
So although the revenues of big-club football are booming, clubs have found it hard to make a profit
and even harder to earn an adequate return for investors. Many clubs only survive because of the
largesse of a sugar daddy a rich owner willing to make up the losses giving them an unfair
advantage over a club that didnt have one of these benefactors. Following a growing sense that
something needed to be done, UEFA issued its financial fair play rules in the 20112012 season.
These rules are trying to change behaviour by focussing on two numbers: losses and wages. The
financial fair play rules seek to limit the ability of clubs to be serial loss makers, and they put a cap on
wage bills. In principle, the rules will be tightened season by season, and backed up by sanctions.

Arsenal
1

Arsenal's investment challenge


Under its French coach, Arsene Wenger, London's Arsenal FC had become one of the world's most
admired big football clubs. Wenger had been the coach since 1996. He was an astute operator in the
market for footballing talent with an excellent network of contacts and talent scouts, especially in the
French-speaking countries. He had a reputation for putting out teams that played elegant football.
But at the turn of the millennium, Arsenal faced a strategic challenge. The iconic Highbury Stadium in
north London, where Arsenal had played for a century, was both out-of-date and far too small. Its
capacity was 38,400 the smallest of any of Arsenals international peers. In the financially
demanding world of big-club football this was a source of weakness, seriously limiting matchday
income. Arsenal had more than 20,000 people on a waiting list for season tickets compelling
evidence of the opportunity cost of their subscale stadium.
Europe's biggest football ground is Barcelona's Camp Nou, which holds 98,772 spectators.
Barcelonas long-term success must have been due in some significant part to its early decision to
build Camp Nou in 1957. By the time Arsenal would commission its new stadium in 2006, Barcelona
had been enjoying Camp Nou revenues for half a century.
An alternative to building a brand new stadium would have been the approach taken by Manchester
United, which had incrementally developed and enlarged the original Old Trafford stadium to its
current capacity of 76,000. But organic growth was not an option for Arsenal because Highbury sat on
a cramped urban site, hemmed in by roads and housing. In any case, part of Highbury was protected
under a government historic building preservation order.
After a long search, Arsenal found an old industrial estate as a site for the new stadium, just 500
metres from Highbury. The challenge was how to pay for the stadium. Building from scratch on a new
site would be more costly than developing an existing stadium. And while many big football clubs had
effectively become trophy assets owned by super-wealthy individuals, or industrial corporations with
deep pockets, Arsenal remained a fairly democratic setup. It was a joint-stock company with shares
traded on the stock market. So Arsenal would have to borrow the money to pay for the stadium on
normal commercial terms like any other company. The danger was that for the foreseeable future,
perhaps for a generation, the burden of servicing the debt would restrict expenditure on players.
Arsene Wenger was not one to understate the burden he carried. On 6th July, 2008, he told the News
of the World, then the UKs leading Sunday tabloid newspaper, that Arsenal would probably be selling
their star players every year for another two decades. "The strategy of the club is to sell every year
and to buy less expensive players. We manage at Arsenal to maintain all our football ambitions,
national and European, while having to free up for 17 more years an annual surplus of 24 million to
pay for our stadium." That is what Wenger claimed he would have to do to find the 400 million or
more that would be needed to pay for the stadium. The reality turned out rather different.

Arsenal
2

Financing the new stadium


Financially, the new stadium was engineered with some brilliance, a fact that partly reflected Arsenals
demographic, and its location. The old stadium was 3 miles, and the new stadium would be 3 miles,
from the Bank of England, which is traditionally seen as the centre of Londons financial district. This
was reflected in Arsenals fan base; equally, Arsenals board of directors was uniquely well connected
in the City of London. Three generations of the Hill-Wood family had served as chairman of the
Arsenal board. The current chairman, Peter Hill-Wood was a Hambros banker and in 2005, as the
new stadium was being funded, he invited onto the board another Hambros colleague, Sir Chips
Keswick. Keswick was a legendary city grandee who subsequently became chairman in 2013.
After a long search, Arsenal eventually chose an industrial estate just five hundred metres from
Highbury as the site for the new stadium. Planning, financing and construction delays meant that it
took seven years between the announcement of the new stadium in November 1999 and its opening
in July 2006 at a final cost of 430m. Work ceased shortly after commencement and only restarted
when a 260m loan was raised from a consortium of banks, led by the Royal Bank of Scotland.
On 13 July 2006, the club issued the first publicly-marketed, asset-backed bonds by a European club,
replacing the bank debt with an issue of 210m of 13.5 year bonds at 0.52% over UK government
bonds, and 50m of 7.1 year bonds at 0.22% over LIBOR. The terms of this debt funding the
interest rate appeared extraordinarily favourable, given the inherent business risk of any football
club, and since the asset being funded a football stadium - was highly specific with no obvious
alternative use.
The new stadium still only seated 60,000 spectators, but contained a higher proportion of executive
and corporate accommodation than any other football stadium in the world. Arsenal had a particularly
wealthy London following and a high demand for tickets, and the new stadium was designed to exploit
this. The seating capacity was 60,355, of which 51,071 was standard seating in two tiers. For the first
season, adult ticket prices ranged from 32 to 66 for most matches, but 46 to 94 for matches
against top sides. Season ticket prices were between 885 and 1,825. The middle tier, the Club
Level, had 7,139 seats, sold on licences lasting from one to four years and costing from 2,500 to
4,750 per season. These sold out immediately. Another 2,222 spectators were housed in boxes of
10, 12 and 15 seats; the box prices started at 65,000 per year. The most exclusive area was the
Diamond Club which was invitation only and cost an initial 25,000, plus 25,000 a year - tickets
included use of a private lounge, a free restaurant and bar, valet parking, a concierge service, and the
opportunity to travel to away games on the players' aeroplane.
In October 2004 Arsenal announced a 100m sponsorship deal with Emirates Airline, involving a
naming deal for the stadium for the first 15 years and an eight-year shirt sponsorship starting in the
200607 season. Nike was signed up as the kit manufacturer. Delaware North, which had a 20-year
contract to run the stadium's catering operation, contributed 15m towards the capital costs of the
catering facilities.
Perhaps the most impressive part of the funding strategy was the exploitation of a property
development opportunity. The spare ground around the new stadium was developed as apartments,
and Highbury itself was converted into apartments. In total, more than 2,000 apartments were built at
three sites. Given the nature of Arsenal's fan base and its location just a stones throw from London's
financial district, the proceeds from these developments might well pay for at least a large part of the
new stadium, in due course.

Arsenal
3

Arsenals financial performance


Companies can choose any accounting year-end, and tend to choose a reporting date that fits the
pattern of their trading. So Arsenals financial year end is May 31, which is effectively the end of the
playing season. Arsenals May 2000 to May 2013 financial statements are summarised in Tables 2
and 3. The full 2013 financial statements can be accessed as a PDF.
When we study the financial performance of a business we have two main concerns. The first
concerns profitability does the business earn an adequate return on the capital provided by
investors, and what are the drivers of its return? The second concern is financial structure what is
the balance between debt and equity capital? How risky is the capital structure? So Table 3 also
calculates some profitability and capital structure metrics for Arsenal.
The information we need to measure profitability and capital structure comes from the financial
statements. So the first step is to read the financial statements and to review the accounting with the
following questions in mind. Is the balance sheet complete in assets and liabilities, and are they fairly
valued? Does the income statement give a comprehensive and accurate account of the earnings of
the business?
The balance sheet is a company's fundamental financial record. It lists the assets and where the
money came from to pay for them. Reviewing Arsenal's balance sheet, we might have the following
questions:

How is the 2013 carrying value of tangible assets measured?

How much do the financial statements tell us about the value of the development properties?

How is the intangible asset number measured, and does it tell us what Arsenals players are
actually worth?

How much is Arsenal borrowing, net of cash? Does it have any off-balance-sheet borrowings,
for example, under operating leases?

The final question is, as of 2013, how have Arsenal managed the cost of financing its new
stadium?

A companys income statement measures its revenues and its costs, and thus its profit in the year.

What were Arsenal's sources of revenue?

Do we get a clear understanding of the various sources of income footballing and otherwise
at Arsenal?

How much of Arsenals financial performance came from football, and how much from its
other activities?

Overall, has Arsenal created value for its investors? Assuming equity investors have a
required return of, say, 10% and that the weighted average cost of capital (WACC) is 8%, has
Arsenals return on capital beaten that?

Arsenal
4

Table 2 Arsenal balance sheets (figures in 000, year end 31 May)

Cash
Receivables
Stock
Development properties
CURRENT ASSETS
Tangible
Goodwill
Intangible
Investments
Other
LONG-TERM ASSETS
TOTAL ASSETS
Debt
Trade creditors
Accruals & deferred income
Other
CURRENT LIABILITIES
Debt
Deferred income
Other
provisions re player tfrs
other provisions
Provisions
LONG-TERM LIABILITIES
Share capital
Share premium
Retained earnings
SHAREHOLDERS FUNDS
TOTAL L&SF

2000
7,261
9,586
582
17,429
36,491

2001
42,502
25,407
638
13,987
82,534
42,024

2002
14,680
9,770
455
25,569
50,474
46,430

2003
1,351
23,148
808
30,745
56,052
124,770

2004
26,003
30,647
702
20,009
77,361
209,615

2005
71,629
26,449
711
28,125
126,914
314,822

2006
35,598
44,736
504
44,446
125,284
451,501

2007
73,857
31,028
11,166
100,080
216,131
455,300

2008
93,264
32,340
1,218
187,964
314,786
449,517

2009
99,617
45,981
1,751
167,007
314,356
440,369

2010
127,607
62,289
1,887
45,755
237,538
434,494

2011
160,229
27,435
1,114
33,460
222,238
431,428

2012
153,625
52,332
1,681
37,595
245,233
427,157

38,832

45,111

53,060

39,396

34,989

28,983

66,555

12,000
87,323
104,752

87,135
169,669

3,781
103,271
153,745

3,563
167,729
223,781

18,697
263,301
340,662

8,479
352,284
479,198

4,253
522,309
647,593

64,671
76
5,117
525,164
741,295

55,665
406
13,939
519,527
834,313

68,446
730
9,508
519,053
833,409

60,661
1,053
2,928
499,136
736,674

55,717
1,648
2,214
491,007
713,245

85,708
2,326
5,201
520,392
765,625

2013
153,457
88,484
2,131
12,987
257,059
421,539
1,924
96,570
3,031
8,287
531,351
788,410

0
740
17,111
16,144
33,995
14,438
1,851
9,460

0
839
34,513
17,260
52,612
14,438
3,906
3,841

0
5,728
32,005
20,817
58,550
14,438
2,051
3,382

47,180
29,317
40,121
9,011
125,629
14,438
815
2,383

23,715
6,843
54,579
18,400
103,537
143,556
2,439
2,584

3,930
3,930
29,679
56
237
40,785
41,078
104,752

3,073
3,073
25,258
59
26,699
65,041
91,799
169,669

3,121
3,121
22,992
59
26,699
45,445
72,203
153,745

4,305
4,305
21,941
59
26,699
49,453
76,211
223,781

4,183
4,183
152,762
59
26,699
57,605
84,363
340,662

19,572
9,491
59,748
18,433
107,244
205,388
27,739
5,579
2,192
8,400
10,592
249,298
62
56,696
65,898
122,656
479,198

22,816
15,747
100,031
29,109
167,703
274,926
35,471
10,843
10,702
17,390
28,092
349,332
62
56,696
73,800
130,558
647,593

4,122
15,723
100,933
29,239
150,017
336,090
68,680
11,350
12,126
19,658
31,784
447,904
62
56,696
76,616
133,374
731,295

142,835
7,844
142,045
41,528
334,252
268,502
31,782
9,919
12,116
18,642
30,758
340,961
62
56,696
102,342
159,100
834,313

134,102
13,698
121,092
45,204
314,096
263,195
20,319
9,234
8,204
24,031
32,235
324,983
62
56,696
137,572
194,330
833,409

5,248
11,079
110,800
27,708
154,835
257,998
14,680
11,205
6,272
36,362
42,634
326,517
62
56,696
198,564
255,322
736,674

5,583
10,324
84,001
31,196
131,104
252,473
13,500
9,939
5,057
33,217
38,274
314,186
62
56,696
211,197
267,955
713,245

5,937
10,983
86,812
41,427
145,159
246,606
12,699
8,761
13,103
41,749
54,852
322,918
62
56,696
240,790
297,548
765,625

6,310
9,191
98,842
35,588
149,931
240,368
21,614
12,739
11,195
49,208
60,403
335,124
62
56,696
246,597
303,355
788,410

Arsenal
5

Table 3 Arsenal income statements (figures in 000, year end 31 May), profitability and financial structure
2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

61,260
-29,692
-22,628
-52,320
-10,172
22,216
0

90,967
-54,233
-44,648
-98,881
-17,681
2,873
-512

117,831
-52,419
-42,593
-95,012
-18,774
1,370
-165

156,887
-61,322
-58,903
-120,225
-26,406
2,282
-67

138,395
-56,606
-49,158
-105,764
-14,993
2,894
204

137,237
-68,929
-56,846
-125,775
-15,401
19,150
499

200,843
-77,650
-81,035
-158,685
-18,782
18,467
435

222,970
-88,258
-86,222
-174,480
-21,757
26,458
469

313,339
-90,690
-160,260
-250,950
-23,876
23,177
455

379,856
-96,652
-222,620
-319,272
-25,033
38,137
463

255,692
-109,578
-102,550
-212,128
-21,658
6,256
822

243,013
-123,298
-99,237
-222,535
-36,802
65,456
952

280,374
-135,483
-131,823
-267,306
-41,349
46,986
945

20,984
243
-12
21,215
-7,105
14,110

62,911
-31,631
-32,636
-64,267
-15,145
25,121
-834
20,000
27,786
1,853
-238
29,401
-5,145
24,256

-23,234
1,087
-196
-22,343
1,781
-20,562

5,250
168
-889
4,529
-521
4,008

12,471
105
-1,999
10,577
-2,425
8,152

20,736
1,601
-3,072
19,265
-10,972
8,293

15,710
2,306
-2,131
15,885
-7,983
7,902

42,278
2,688
-39,393
5,573
-2,757
2,816

53,660
4,037
-21,029
36,668
-10,942
25,726

62,145
2,714
-19,347
45,512
-10,282
35,230

74,151
697
-18,880
55,968
5,024
60,992

28,984
566
-14,774
14,776
-2,143
12,633

50,084
955
-14,451
36,588
-6,995
29,593

19,650
1,124
-14,120
6,654
-849
5,805

EBIAT

13,948

23,126

-21,186

4,513

9,478

9,323

7,780

28,510

37,960

47,206

74,084

22,863

39,580

15,682

Debt
less Cash
Equity
CAPITAL EMPLOYED
Average equity
Average capital employed

14,438
-7,261
41,078
48,255

14,438
-42,502
91,799
63,735
66,439
55,995

14,438
-14,680
72,203
71,961
82,001
67,848

61,618
-1,351
76,211
136,478
74,207
104,220

167,271
-26,003
84,363
225,631
80,287
181,055

224,960
-71,629
122,656
275,987
103,510
250,809

297,742
-35,598
130,558
392,702
126,607
334,345

340,212
-73,857
133,374
399,729
131,966
396,216

411,337
-93,264
159,100
477,173
146,237
438,451

397,297
-99,617
194,330
492,010
176,715
484,592

263,246
-127,607
255,322
390,961
224,826
441,486

258,056
-160,229
267,955
365,782
261,639
378,372

252,543
-153,625
297,548
396,466
282,752
381,124

246,678
-153,457
303,355
396,576
300,452
396,521

METRICS
Return on Capital Employed
Return on Capital Employed, after tax
Return on Equity
Economic Profit

49.6%
41.3%
36.5%
18,646

-34.2%
-31.2%
-25.1%
-26,614

5.0%
4.3%
5.4%
-3,825

6.9%
5.2%
10.2%
-5,007

8.3%
3.7%
8.0%
-10,742

4.7%
2.3%
6.2%
-18,968

10.7%
7.2%
2.1%
-3,188

12.2%
8.7%
17.6%
2,884

12.8%
9.7%
19.9%
8,438

16.8%
16.8%
27.1%
38,765

7.7%
6.0%
4.8%
-7,407

13.1%
10.4%
10.5%
9,090

5.0%
4.0%
1.9%
-16,040

Gearing

-44.0%

-0.3%

44.2%

62.6%

55.6%

66.8%

66.6%

66.7%

60.5%

34.7%

26.7%

24.9%

23.5%

SALES
wages & salaries
other operating expenses
Operating Expenses
Amortisation of players
Profit on disposal of players
Share of Joint Venture
Exceptional: profit
EBIT
Interest income
Interest expense
EARNINGS BEFORE TAX
Tax
EARNINGS

Arsenal
6